Vol. 78 Thursday, 

No. 31 February 14, 2013 

Part III 

Bureau of Consumer Financial Protection 

12 CFR Part 1026 

Mortgage Servicing Rules Under the Truth in Lending Act (Regulation Z); 

Final Rule 

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10902 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

1Public Law 111–203, 124 Stat. 1376 (2010). 

2See Press Release, U.S. Consumer Fin. Prot. 

Bureau, Consumer Financial Protection Bureau 

Proposes Rules to Protect Mortgage Borrowers (Aug. 

10, 2012) available at http://www.consumerfinance.

gov/pressreleases/consumer-financial-protectionbureau-proposes-rules-to-protect-mortgageborrowers/. The proposal was published in the 

Federal Register on September 17, 2012. 77 FR 

57200 (Sept. 17 2012) (2012 RESPA Servicing 

Proposal). 

3See Press Release, U.S. Consumer Fin. Prot. 

Bureau, Consumer Financial Protection Bureau 

Proposes Rules to Protect Mortgage Borrowers 

(August 10, 2012) available at http://www.consumer

finance.gov/pressreleases/consumer-financialprotection-bureau-proposes-rules-to-protectmortgage-borrowers/. This proposal was also 

published in the Federal Register on September 17, 

2012. 77 FR 57318 (Sept. 17, 2012) (2012 TILA 

Servicing Proposal; and, together with the 2012 

RESPA Servicing Proposal, the Proposed Servicing 

Rules). 

4The 2013 RESPA Servicing Final Rule and the 

2013 TILA Servicing Final Rule are referred to 

collectively as the Final Servicing Rules. 

5For ease of discussion, this notice uses the term 

‘‘discretionary rulemakings’’ to refer to a set of 

regulations implemented using the Bureau’s 

authorities under section 6(j), 6(k)(1)(E), or 19(a) of 

RESPA to expand requirements beyond those 

explicit in RESPA. The ‘‘discretionary rulemakings’’ 

include requirements relating to servicer policies 

and procedures, early intervention with delinquent 

borrowers, continuity of contact, and procedures for 

evaluating and responding to loss mitigation 

applications, as set forth in §§ 1024.38–1024.41. 

6Note that TILA and RESPA differ in their 

terminology. Whereas Regulation Z generally refers 

to ‘‘consumers’’ and ‘‘creditors,’’ Regulation X 

generally refers to ‘‘borrowers’’ and ‘‘lenders.’’ 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

12 CFR Part 1026 

[Docket No. CFPB–2012–0033] 

RIN 3170–AA14 

Mortgage Servicing Rules Under the 

Truth in Lending Act (Regulation Z) 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Final rule; official 

interpretations. 

SUMMARY: The Bureau of Consumer 

Financial Protection is amending 

Regulation Z, which implements the 

Truth in Lending Act and the official 

interpretation to the regulation, which 

interprets the requirements of 

Regulation Z. This final rule 

implements provisions of the DoddFrank Wall Street Reform and Consumer 

Protection Act regarding mortgage loan 

servicing. Specifically, this final rule 

implements Dodd-Frank Act sections 

addressing initial rate adjustment 

notices for adjustable-rate mortgages, 

periodic statements for residential 

mortgage loans, prompt crediting of 

mortgage payments, and responses to 

requests for payoff amounts. This final 

rule also amends current rules 

governing the scope, timing, content, 

and format of disclosures to consumers 

regarding the interest rate adjustments 

of their variable-rate transactions. 

Concurrently with the issuance of this 

final rule, the Bureau is amending 

Regulation X, which contains 

companion rules implementing 

amendments to the Real Estate 

Settlement Procedures Act of 1974. 

DATES: This final rule is effective on 

January 10, 2014. 

FOR FURTHER INFORMATION CONTACT: 

Regulation Z (TILA): Whitney Patross, 

Attorney; Marta Tanenhaus or Mitchell 

E. Hochberg, Senior Counsels, Office of 

Regulations, at (202) 435–7700. 

Regulation X (RESPA): Whitney 

Patross, Attorney; Jane Gao, Terry 

Randall or Michael Scherzer, Counsels; 

Lisa Cole or Mitchell E. Hochberg, 

Senior Counsels, Office of Regulations, 

at (202) 435–7700. 

SUPPLEMENTARY INFORMATION: 

I. Summary of the Final Rule 

The Bureau of Consumer Financial 

Protection (Bureau) is amending 

Regulation Z, which implements the 

Truth in Lending Act (TILA) and the 

official interpretation to the regulation 

(the 2013 TILA Servicing Final Rule). 

The final rule implements provisions of 

the Dodd-Frank Wall Street Reform and 

Consumer Protection Act regarding 

mortgage loan servicing.1 Specifically, 

this final rule implements Dodd-Frank 

Act sections addressing initial interest 

rate adjustment notices for adjustablerate mortgages (ARMs), periodic 

statements for residential mortgage 

loans, prompt crediting of mortgage 

payments, and responses to requests for 

payoff amounts. This final rule also 

amends current rules governing the 

scope, timing, content, and format of 

disclosures to consumers occasioned by 

the interest rate adjustments of their 

variable-rate transactions. Concurrently 

with the issuance of this final rule, the 

Bureau is amending Regulation X, 

which contains companion rules 

implementing amendments to the Real 

Estate Settlement Procedures Act of 

1974 (the 2013 RESPA Servicing Final 

Rule). 

On August 10, 2012, the Bureau 

issued proposed rules that would have 

amended Regulation X, which 

implements RESPA,2 as well as 

Regulation Z, which implements TILA,3

regarding mortgage servicing 

requirements.4 The Proposed Servicing 

Rules proposed to implement the DoddFrank Act amendments to TILA and 

RESPA with respect to, among other 

things, periodic mortgage statements, 

disclosures for ARMs, prompt crediting 

of mortgage loan payments, requests for 

mortgage loan payoff statements, error 

resolution, information requests, and 

protections relating to force-placed 

insurance. In the 2012 RESPA Servicing 

Proposal, the Bureau also proposed to 

use its authority to adopt requirements 

relating to servicer policies and 

procedures, early intervention with 

delinquent borrowers, continuity of 

contact, and procedures for evaluating 

and responding to loss mitigation 

applications.5 The proposals sought to 

address fundamental problems that 

underlie many consumer complaints 

and recent regulatory and enforcement 

actions, as set forth in more detail 

below. 

The Bureau is finalizing the Proposed 

Servicing Rules with respect to nine 

major topics, as summarized below, as 

well as certain technical and 

streamlining amendments. The goals of 

the Final Servicing Rules are to provide 

better disclosure to consumers of their 

mortgage loan obligations and to better 

inform consumers of, and assist 

consumers with, options that may be 

available for consumers having 

difficulty with their mortgage loan 

obligations. The amendments also 

address critical servicer practices 

relating to, among other things, 

correcting errors, imposing charges for 

force-placed insurance, crediting 

mortgage loan payments, and providing 

payoff statements. The Bureau’s final 

rules are set forth in two separate 

notices because some provisions 

implement requirements that Congress 

imposed under TILA while other 

provisions implement requirements 

Congress imposed under RESPA.6

A. Major Topics in the Final Servicing 

Rules 

1. Periodic billing statements (2013 

TILA Servicing Final Rule). Creditors, 

assignees, and servicers must provide a 

periodic statement for each billing cycle 

containing, among other things, 

information on payments currently due 

and previously made, fees imposed, 

transaction activity, application of past 

payments, contact information for the 

servicer and housing counselors, and, 

where applicable, information regarding 

delinquencies. These statements must 

meet the timing, form, and content 

requirements provided in the rule. The 

rule contains sample forms that may be 

used. The periodic statement 

requirement generally does not apply to 

fixed-rate loans if the servicer provides 

a coupon book, so long as the coupon 

book contains certain information 

specified in the rule and certain other 

information specified in the rule is 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10903 

made available to the consumer. The 

rule also includes an exemption for 

small servicers as discussed below. 

2. Interest rate adjustment notices 

(2013 TILA Servicing Final Rule). 

Creditors, assignees, and servicers must 

provide a consumer whose mortgage has 

an adjustable rate with a notice between 

210 and 240 days prior to the first 

payment due after the rate first adjusts. 

This notice may contain an estimate of 

the new rate and new payment. 

Creditors, assignees, and servicers also 

must provide a notice between 60 and 

120 days before payment at a new level 

is due when a rate adjustment causes 

the payment to change. The current 

annual notice that must be provided for 

ARMs for which the interest rate, but 

not the payment, has changed over the 

course of the year is no longer required. 

The rule contains model and sample 

forms that servicers may use. 

3. Prompt payment crediting and 

payoff statements (2013 TILA Servicing 

Final Rule). Servicers must promptly 

credit periodic payments from 

borrowers as of the day of receipt. A 

periodic payment consists of principal, 

interest, and escrow (if applicable). If a 

servicer receives a payment that is less 

than the amount due for a periodic 

payment, the payment may be held in 

a suspense account. When the amount 

in the suspense account covers a 

periodic payment, the servicer must 

apply the funds to the consumer’s 

account. In addition, creditors, 

assignees, and servicers must provide an 

accurate payoff balance to a consumer 

no later than seven business days after 

receipt of a written request from the 

consumer for such information. 

4. Force-placed insurance (2013 

RESPA Servicing Final Rule). Servicers 

are prohibited from charging a borrower 

for force-placed insurance coverage 

unless the servicer has a reasonable 

basis to believe the borrower has failed 

to maintain hazard insurance, as 

required by the loan agreement, and has 

provided required notices. An initial 

notice must be sent to the borrower at 

least 45 days before charging the 

borrower for force-placed insurance 

coverage, and a second reminder notice 

must be sent no earlier than 30 days 

after the first notice. The rule contains 

model forms that servicers may use. If 

a borrower provides proof of hazard 

insurance coverage, the servicer must 

cancel any force-placed insurance 

policy and refund any premiums paid 

for overlapping periods in which the 

borrower’s coverage was in place. The 

rule also provides that charges related to 

force-placed insurance (other than those 

subject to State regulation as the 

business of insurance or authorized by 

Federal law for flood insurance) must be 

for a service that was actually performed 

and must bear a reasonable relationship 

to the servicer’s cost of providing the 

service. Where the borrower has an 

escrow account for the payment of 

hazard insurance premiums, the 

servicer is prohibited from obtaining 

force-place insurance where the servicer 

can continue the borrower’s homeowner 

insurance, even if the servicer needs to 

advance funds to the borrower’s escrow 

account to do so. The rule against 

obtaining force-placed insurance in 

cases in which hazard insurance may be 

maintained through an escrow account 

exempts small servicers, as discussed 

below, so long as any force-placed 

insurance purchased by the small 

servicer is less expensive to a borrower 

than the amount of any disbursement 

the servicer would have made to 

maintain hazard insurance coverage. 

5. Error resolution and information 

requests (2013 RESPA Servicing Final 

Rule). Servicers are required to meet 

certain procedural requirements for 

responding to written information 

requests or complaints of errors. The 

rule requires servicers to comply with 

the error resolution procedures for 

certain listed errors as well as any error 

relating to the servicing of a mortgage 

loan. Servicers may designate a specific 

address for borrowers to use. Servicers 

generally are required to acknowledge 

the request or notice of error within five 

days. Servicers also generally are 

required to correct the error asserted by 

the borrower and provide the borrower 

written notification of the correction, or 

to conduct an investigation and provide 

the borrower written notification that no 

error occurred, within 30 to 45 days. 

Further, within a similar amount of 

time, servicers generally are required to 

acknowledge borrower written requests 

for information and either provide the 

information or explain why the 

information is not available. 

6. General servicing policies, 

procedures, and requirements (2013 

RESPA Servicing Final Rule). Servicers 

are required to establish policies and 

procedures reasonably designed to 

achieve objectives specified in the rule. 

The reasonableness of a servicer’s 

policies and procedures takes into 

account the size, scope, and nature of 

the servicer’s operations. Examples of 

the specified objectives include 

accessing and providing accurate and 

timely information to borrowers, 

investors, and courts; properly 

evaluating loss mitigation applications 

in accordance with the eligibility rules 

established by investors; facilitating 

oversight of, and compliance by, service 

providers; facilitating transfer of 

information during servicing transfers; 

and informing borrowers of the 

availability of written error resolution 

and information request procedures. In 

addition, servicers are required to retain 

records relating to each mortgage loan 

until one year after the mortgage loan is 

discharged or servicing is transferred, 

and to maintain certain documents and 

information for each mortgage loan in a 

manner that enables the servicers to 

compile it into a servicing file within 

five days. This section includes an 

exemption for small servicers as 

discussed below. The Bureau and 

prudential regulators will be able to 

supervise servicers within their 

jurisdiction to assure compliance with 

these requirements but there will not be 

a private right of action to enforce these 

provisions. 

7. Early intervention with delinquent 

borrowers (2013 RESPA Servicing Final 

Rule). Servicers must establish or make 

good faith efforts to establish live 

contact with borrowers by the 36th day 

of their delinquency and promptly 

inform such borrowers, where 

appropriate, that loss mitigation options 

may be available. In addition, a servicer 

must provide a borrower a written 

notice with information about loss 

mitigation options by the 45th day of a 

borrower’s delinquency. The rule 

contains model language servicers may 

use for the written notice. This section 

includes an exemption for small 

servicers as discussed below. 

8. Continuity of contact with 

delinquent borrowers (2013 RESPA 

Servicing Final Rule). Servicers are 

required to maintain reasonable policies 

and procedures with respect to 

providing delinquent borrowers with 

access to personnel to assist them with 

loss mitigation options where 

applicable. The policies and procedures 

must be reasonably designed to ensure 

that a servicer assigns personnel to a 

delinquent borrower by the time a 

servicer provides such borrower with 

the written notice required by the early 

intervention requirements, but in any 

event, by the 45th day of a borrower’s 

delinquency. These personnel should be 

accessible to the borrower by phone to 

assist the borrower in pursuing loss 

mitigation options, including advising 

the borrower on the status of any loss 

mitigation application and applicable 

timelines. The personnel should be able 

to access all of the information provided 

by the borrower to the servicer and 

provide that information, when 

appropriate, to those responsible for 

evaluating the borrower for loss 

mitigation options. This section 

includes an exemption for small 

servicers as discussed below. The 

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10904 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

Bureau and the prudential regulators 

will be able to supervise servicers 

within their jurisdiction to assure 

compliance with these requirements but 

there will not be a private right of action 

to enforce these provisions. 

9. Loss Mitigation Procedures (2013 

RESPA Servicing Final Rule). Servicers 

are required to follow specified loss 

mitigation procedures for a mortgage 

loan secured by a borrower’s principal 

residence. If a borrower submits an 

application for a loss mitigation option, 

the servicer is generally required to 

acknowledge the receipt of the 

application in writing within five days 

and inform the borrower whether the 

application is complete and, if not, what 

information is needed to complete the 

application. The servicer is required to 

exercise reasonable diligence in 

obtaining documents and information to 

complete the application. 

For a complete loss mitigation 

application received more than 37 days 

before a foreclosure sale, the servicer is 

required to evaluate the borrower, 

within 30 days, for all loss mitigation 

options for which the borrower may be 

eligible in accordance with the 

investor’s eligibility rules, including 

both options that enable the borrower to 

retain the home (such as a loan 

modification) and non-retention options 

(such as a short sale). Servicers are free 

to follow ‘‘waterfalls’’ established by an 

investor to determine eligibility for 

particular loss mitigation options. The 

servicer must provide the borrower with 

a written decision, including an 

explanation of the reasons for denying 

the borrower for any loan modification 

option offered by an owner or assignee 

of a mortgage loan with any inputs used 

to make a net present value calculation 

to the extent such inputs were the basis 

for the denial. A borrower may appeal 

a denial of a loan modification program 

so long as the borrower’s complete loss 

mitigation application is received 90 

days or more before a scheduled 

foreclosure sale. 

The rule restricts ‘‘dual tracking,’’ 

where a servicer is simultaneously 

evaluating a consumer for loan 

modifications or other alternatives at the 

same time that it prepares to foreclose 

on the property. Specifically, the rule 

prohibits a servicer from making the 

first notice or filing required for a 

foreclosure process until a mortgage 

loan account is more than 120 days 

delinquent. Even if a borrower is more 

than 120 days delinquent, if a borrower 

submits a complete application for a 

loss mitigation option before a servicer 

has made the first notice or filing 

required for a foreclosure process, a 

servicer may not start the foreclosure 

process unless (1) the servicer informs 

the borrower that the borrower is not 

eligible for any loss mitigation option 

(and any appeal has been exhausted), (2) 

a borrower rejects all loss mitigation 

offers, or (3) a borrower fails to comply 

with the terms of a loss mitigation 

option such as a trial modification. 

If a borrower submits a complete 

application for a loss mitigation option 

after the foreclosure process has 

commenced but more than 37 days 

before a foreclosure sale, a servicer may 

not move for a foreclosure judgment or 

order of sale, or conduct a foreclosure 

sale, until one of the same three 

conditions has been satisfied. In all of 

these situations, the servicer is 

responsible for promptly instructing 

foreclosure counsel retained by the 

servicer not to proceed with filing for 

foreclosure judgment or order of sale, or 

to conduct a foreclosure sale, as 

applicable. 

This section includes an exemption 

for small servicers as defined above. 

However, a small servicer is required to 

comply with two requirements: (1) A 

small servicer may not make the first 

notice or filing required for a foreclosure 

process unless a borrower is more than 

120 days delinquent, and (2) a small 

servicer may not proceed to foreclosure 

judgment or order of sale, or conduct a 

foreclosure sale, if a borrower is 

performing pursuant to the terms of a 

loss mitigation agreement. 

All of the provisions in the section 

relating to loss mitigation can be 

enforced by individuals. Additionally, 

the Bureau and the prudential regulators 

can also supervise servicers within their 

jurisdiction to assure compliance with 

these requirements. 

B. Scope of the Final Servicing Rules 

The Final Servicing Rules have 

somewhat different scopes, with respect 

to the types of mortgage loan 

transactions covered and the loans that 

are exempted. With respect to the 2013 

TILA Servicing Final Rule, certain 

requirements, specifically the periodic 

statement and ARM disclosure 

requirements, only apply to closed-end 

mortgage loans, whereas other 

requirements, specifically the 

requirements for crediting of payments 

and providing payoff statements, apply 

to both open-end and closed-end 

mortgage loans. Reverse mortgage 

transactions and timeshare plans are 

exempt from the periodic statement 

requirement. ARMs with terms of one 

year or less are exempt from the ARM 

disclosure requirements. 

With respect to the 2013 RESPA 

Servicing Final Rule, certain 

requirements generally apply to 

federally related mortgage loans that are 

closed-end, with certain exemptions for 

loans on property of 25 acres or more, 

business-purpose loans, temporary 

financing, loans secured by vacant land, 

and certain loan assumptions or 

conversions. Open-end lines of credit 

(home equity plans) are generally 

exempt from the requirements in the 

2013 RESPA Servicing Final Rule. The 

general servicing policies, procedure, 

and requirements, early intervention, 

continuity of contact, and loss 

mitigation procedures provisions are 

generally inapplicable to servicers of 

reverse mortgage transactions or to 

servicers of mortgage loans for which 

the servicers are also qualified lenders 

under the Farm Credit Act of 1971. 

In the 2013 TILA Servicing Final 

Rule, the Bureau is exercising its 

authority under TILA to provide an 

exemption from the periodic statement 

requirement for small servicers, defined 

as servicers that service 5,000 mortgage 

loans or less and only service mortgage 

loans the servicer or an affiliate owns or 

originated (small servicers). In the 2013 

RESPA Servicing Final Rule, the Bureau 

has elected not to extend to these small 

servicers most provisions of the Final 

Rule that are not being promulgated to 

implement specific mandates in the 

Dodd-Frank Act but are, instead, being 

issued by the Bureau, in the exercise of 

its discretion, pursuant to its general 

rulemaking authority under RESPA, as 

amended by the Dodd-Frank Act. The 

exemptions from the discretionary 

rulemakings include those relating to 

general servicing policies, procedures, 

and requirements; early intervention 

with delinquent borrowers; continuity 

of contact; and most of the requirements 

for evaluating and responding to loss 

mitigation applications. Further, the 

Bureau is not restricting small servicers 

from purchasing force-placed insurance 

for borrowers with escrow accounts for 

the payment of hazard insurance, so 

long as the cost to the borrower of the 

force-placed insurance obtained by a 

small servicer is less than the amount 

the small servicer would be required to 

disburse from the borrower’s escrow 

account to ensure that the borrower’s 

hazard insurance premium charges were 

paid in a timely manner. Small servicers 

are required to comply with limited loss 

mitigation procedure requirements. 

These include (1) a prohibition on 

making the first notice or filing required 

for a foreclosure process unless a 

borrower is more than 120 days 

delinquent and (2) a prohibition on 

making the first notice or filing or 

moving for foreclosure judgment or 

order of sale, or conducting a 

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7 Inside Mortg. Fin., Outstanding 1–4 Family 

Mortgage Securities, in 2 The 2012 Mortgage Market 

Statistical Annual 7 (2012). For general background 

on the market and the recent crisis, see the 2012 

TILA–RESPA Proposal available at http:// 

www.consumerfinance.gov/knowbeforeyouowe/ 

(last accessed Jan. 10, 2013). 

8As of June 2012, approximately 36% of 

outstanding mortgage loans were held in portfolio; 

54% of mortgage loans were owned through 

mortgage-backed securities issued by Federal 

National Mortgage Association (Fannie Mae) and 

the Federal Home Loan Mortgage Corporation 

(Freddie Mac), together referred to as the 

government-sponsored enterprises (GSEs), as well 

as securities issued by the Government National 

Mortgage Association (Ginnie Mae); and 10% of 

loans were owned through private label mortgagebacked securities. Strengthening the Housing 

Market and Minimizing Losses to Taxpayers, 

Hearing Before the S. Comm. on Banking, Housing 

and Urban Affairs (2012)(Testimony of Laurie 

Goodman, Amherst Securities), available at http:// 

banking.senate.gov/public/index.cfm?FuseAction=

Hearings.Testimony&Hearing_ID=53bda60f-64c1-

43d8-9adf-a693c31eb56b&Witness_ID=b06f2fb1- 

59dd-4881-86cb-1082464d3119. A securitization 

results in the economic separation of the legal title 

to the mortgage loan and a beneficial interest in the 

mortgage loan obligation. In a securitization 

transaction, a securitization trust is the owner or 

assignee of a mortgage loan. An investor is a 

creditor of the trust and is entitled to cash flows 

that are derived from the proceeds of the mortgage 

loans. In general, certain investors (or an insurer 

entitled to act on behalf of the investors) may direct 

the trust to take action as the owner or assignee of 

the mortgage loans for the benefit of the investors 

or insurers. See, e.g., Adam Levitin & Tara Twomey, 

Mortgage Servicing, 28 Yale J. on Reg. 1, 11 (2011) 

(Levitin & Twomey). 

9See, e.g., Levitin & Twomey, at 11 (‘‘All 

securitizations involved third-party servicers * * * 

[m]ortgage servicers provide the critical link 

between mortgage borrowers and the SPV and 

RMBS investors, and servicing arrangements are an 

indispensable part of securitization.’’). 

10See, e.g., Diane E. Thompson, Foreclosing 

Modifications: How Servicer Incentives Discourage 

Loan Modifications, 86 Wash. L. Rev. 755, 763 

(2011) (‘‘Thompson’’). 

11See Top 100 Mortgage Servicers in 2012, Inside 

Mortg. Fin., Sept. 28, 2012, at 13 (As of the end of 

the fourth quarter of 2011, the top five largest 

servicers serviced $5.66 trillion of mortgage loans). 

12Fitch Ratings, U.S. Residential and Small 

Balance Commercial Mortgage Servicer Rating 

Criteria, at 14–15 (Jan. 31, 2011), available at http:// 

www.fitchratings.com. (account required to access 

information). 

13At securitization, the cash flow that was part 

of interest income is bifurcated between the loan 

and the mortgage servicing right (MSR). The MSR 

represents the present value of all the cash flows, 

both positive and negative, related to servicing a 

mortgage. Prime MSRs are largely created by the 

GSE minimum servicing fee rate, which is 

calculated as 25 basis points (bps) per annum. The 

servicing fee rate is typically paid to the servicer 

monthly and the monthly amount owed is 

calculated by multiplying the pro rata portion of the 

servicing fee rate by the stated principal balance of 

the mortgage loan at the payment due date. 

Accounting rules require that a capitalized asset be 

created if the ‘‘compensation’’ for servicing 

(including float/ancillary) exceeds ‘‘adequate 

compensation.’’ For loans held in portfolio, there is 

no bifurcation of the interest income from the loan. 

The owner of the loan simply negotiates pricing, 

terms, and standards with the servicer, which, at 

larger institutions, is typically a separate affiliate or 

subsidiary of the owner of the loans. Keefe, Bruyette 

& Woods, Inc., PowerPoint Presentation, KBW 

Mortgage Matters: Mortgage Servicing Primer (Apr. 

2012). 

foreclosure sale, when a borrower is 

performing pursuant to the terms of a 

loss mitigation agreement. The 

exemptions applicable to small servicers 

in the 2013 TILA Servicing Rule and the 

2013 RESPA Servicing Rule are also 

being extended to Housing Finance 

Agencies, without regard to the number 

of mortgage loans serviced by any such 

agency, and these agencies are included 

within the definition of small servicer. 

II. Background 

A. Overview of the Mortgage Servicing 

Market and Market Failures 

The mortgage market is the single 

largest market for consumer financial 

products and services in the United 

States, with approximately $10.3 trillion 

in loans outstanding.7 Mortgage 

servicers play a vital role within the 

broader market by undertaking the dayto-day management of mortgage loans 

on behalf of lenders who hold the loans 

in their portfolios or (where a loan has 

been securitized) investors who are 

entitled to the loan proceeds.8 Over 60 

percent of mortgage loans are serviced 

by mortgage servicers for investors. 

Servicers’ duties typically include 

billing borrowers for amounts due, 

collecting and allocating payments, 

maintaining and disbursing funds from 

escrow accounts, reporting to creditors 

or investors, and pursuing collection 

and loss mitigation activities (including 

foreclosures and loan modifications) 

with respect to delinquent borrowers. 

Indeed, without dedicated companies to 

perform these activities, it is 

questionable whether a secondary 

market for mortgage-backed securities 

would exist in this country.9 Given the 

nature of their activities, servicers can 

have a direct and profound impact on 

borrowers. 

Mortgage servicing is performed by 

banks, thrifts, credit unions, and nonbanks under a variety of business 

models. In some cases, creditors service 

mortgage loans that they originate or 

purchase and hold in portfolio. Other 

creditors sell the ownership of the 

underlying mortgage loan, but retain the 

mortgage servicing rights in order to 

retain the relationship with the 

borrower, as well as the servicing fee 

and other ancillary income. In still other 

cases, servicers have no role at all in 

origination or loan ownership, but 

rather purchase mortgage servicing 

rights on securitized loans or are hired 

to service a portfolio lender’s loans.10

These different servicing structures 

can create difficulties for borrowers if a 

servicer makes mistakes, fails to invest 

sufficient resources in its servicing 

operations, or avoids opportunities to 

work with borrowers for the mutual 

benefit of both borrowers and owners or 

assignees of mortgage loans. Although 

the mortgage servicing industry has 

numerous participants, the industry is 

highly concentrated, with the five 

largest servicers servicing 

approximately 53 percent of outstanding 

mortgage loans in this country.11 Small 

servicers generally operate in discrete 

segments of the market, for example, by 

specializing in servicing delinquent 

loans, or by servicing loans that they 

originate.12

Contracts between the servicer and 

the mortgage loan owner specify the 

rights and responsibilities of each party. 

In the context of securitized loans, the 

contracts may require the servicer to 

balance the competing interests of 

different classes of investors when 

borrowers become delinquent. Certain 

provisions in servicing contracts may 

limit the servicer’s ability to offer 

certain types of loan modifications to 

borrowers. Such contracts also may 

limit the circumstances under which 

owners or assignees of mortgage loans 

can transfer servicing rights to a 

different servicer. Further, servicer 

contracts govern servicer requirements 

to advance payments to owners of 

mortgage loans, and to recoup advances 

made by servicers, including from 

ultimate recoveries on liquidated 

properties. 

Compensation structures vary 

somewhat for loans held in portfolio 

and securitized loans,13 but have tended 

to make pure mortgage servicing (where 

the servicer has no role in origination) 

a high-volume, low-margin business. 

Such compensation structures 

incentivize servicers to ensure that 

investment in operations closely tracks 

servicer expectations of delinquent 

accounts, and an increase in the number 

of delinquent accounts a servicer must 

service beyond that projected by the 

servicer strains available servicer 

resources. A servicer will expect to 

recoup its investment in purchasing 

mortgage servicing rights and earn a 

profit primarily through a net servicing 

fee (which is typically expressed as a 

constant rate assessed on unpaid 

mortgage balances), interest float on 

payment accounts between receipt and 

disbursement, and cross-marketing 

other products and services to 

borrowers. Under this business model, 

servicers act primarily as payment 

collectors and processors, and will have 

limited incentives to provide other 

customer service. Servicers greatly vary 

in the extent to which they invest in 

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10906 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

14Richard O’Brien, High Time for High-Touch, 

Mortg. Banking, Feb. 1, 2009, at 39. Industry 

participants generally indicated to the Bureau that 

servicers targeted a loan to employee ratio of 1,000– 

1,200 mortgage loans per full time employee for 

mortgage loans that are current, and 125—150 

mortgage loans per full time employee for mortgage 

loans that are delinquent. Between 1992 and 2000, 

as servicers sought to make their operations more 

efficient, loans serviced per full time employee 

increased from approximately 700 loans in 1992 to 

over 1,200 loans by 2000. Michael A. Stegman et 

al., Preventative Servicing is Good for Business and 

Affordable Homeownership Policy, 18 Housing 

Pol’y Debate 243, 274 (2007). As an example of 

current mortgage servicing staffing levels, Ocwen 

services 162 mortgage loans per servicing employee. 

See Morningstar Credit Ratings, LLC, Operational 

Risk Assessment—Ocwen Loan Servicing, LLC, at 7 

(2012) available at http://www.ocwen.com/docs/ 

Morningstar-Sept-2012.pdf. 

15See, e.g., Bank of America, Mortgage Servicing 

Fees, available at https://www8.bankofamerica.

com/home-loans/mortgage-servicing-fees.go (last 

accessed Jan. 11, 2013); Metro Credit Union, 

Mortgage Servicing Fee Schedule, available at 

http://www.metrocu.org/home/fiFiles/static/

documents/Mortgage_Servicing_Fee_Schedule.pdf 

(last accessed Jan. 6, 2013); Acqura Loan Services, 

Mortgage Loan Servicing Fee Schedule, available at 

http://www.acqurals.com/feeschedule.html (last 

accessed Jan. 11, 2013); Sovereign Bank, FAQ— 

What are the Mortgage Loan Servicing Fees?, 

available at https://customerservice.sovereignbank.

com/app/answers/detail/a_id/22/∼/what-are-themortgage-loan-servicing-fees%3F (last accessed Jan. 

11, 2013). 

16See Problems in Mortgage Servicing from 

Modification to Foreclosure: Hearings Before the S. 

Comm. on Banking, Hous., & Urban Affairs, 111th 

Cong. 53–54 (2010) (statement of Thomas J. Miller, 

Iowa Att’y Gen.) (‘‘Miller Testimony’’). See also, 

Kurt Eggert, Limiting Abuse and Opportunism by 

Mortgage Servicers, 15 Housing Pol’y Debate 753 

(2004), available at http://ssrn.com/ 

abstract=992095. 17See Kurt Eggert, Limiting Abuse and 

Opportunism by Mortgage Servicers, 15 Housing 

Pol’y Debate 753 (2004), available at http:// 

ssrn.com/abstract=992095 (collecting cases). 18U.S. Census Bureau, Table 1194: Mortgage 

Originations and Delinquency and Foreclosure 

Rates: 1990 to 2010, in The 2012 Statistical Abstract 

of the United States, (2012), available at http:// 

www.census.gov/compendia/statab/2012/tables/ 

12s1194.pdf (last accessed Jan. 6, 2013). 

19See U.S. Dep’t of the Treasury, Making Contact: 

The Path to Improving Mortgage Industry 

Communication with Homeowners, at 3 (2012), 

available at http://www.treasury.gov/initiatives/

financial-stability/reports/Documents/SPOC%20

Special%20Report_Final.pdf (last accessed Jan. 6, 

2013). 

20See U.S. Gov’t Accountability Office, GAO–10– 

634, Troubled Asset Relief Program: Further 

Actions Needed To Fully and Equitably Implement 

Foreclosure Mitigation Programs, at 15 (2010). 

21Press Release, Office of the Comptroller of the 

Currency, NR 2011–47, OCC Takes Enforcement 

Action Against Eight Servicers for Unsafe and 

Unsound Foreclosure Practices (Apr. 13, 2011), 

available at http://www.occ.gov/news-issuances/ 

news-releases/2011/nr-occ-2011-47.html; Press 

Release, Fed. Reserve Bd., Federal Reserve Issues 

Enforcement Actions Related to Deficient Practices 

in Residential Mortgage Loan Servicing (April 13, 

2011) (‘‘Fed Press Release’’), available at http:// 

www.federalreserve.gov/newsevents/press/ 

enforcement/20110413a.htm. In addition to 

enforcement actions against major servicers, Federal 

agencies have also undertaken formal enforcement 

actions against major service providers to mortgage 

servicers. 

22Press Release, Federal Reserve Bd., Federal 

Reserve Issues Enforcement Actions Related to 

Deficient Practices in Residential Mortgage Loan 

Servicing (April 13, 2011), available at http:// 

www.federalreserve.gov/newsevents/press/ 

enforcement/20110413a.htm. None of the servicers 

admitted or denied the OCC’s or Federal Reserve 

Board’s findings. 

23See, e.g., Jody Shenn, PIMCO: This is who’s 

actually going to be punished by the mortgage fraud 

settlement, Bloomberg News, February 10, 2012; cf., 

Office of Inspector Gen., Fed. Hous. Fin. Agency, 

Evaluation of FHFA’s Oversight of Fannie Mae’s 

customer service infrastructure. For 

example, servicer staffing ratios have 

varied between approximately 100 loans 

per full-time employee to over 4,000 

loans per full time employee.14

Servicers are generally not subject to 

market discipline from consumers 

because consumers have little 

opportunity to switch servicers. Rather, 

servicers compete to obtain business 

from the owners of loans—investors, 

assignees, and creditors—and thus 

competitive pressures tend to drive 

servicers to lower the price of servicing 

and scale their investment in providing 

service to consumers accordingly. 

Servicers also earn revenue from fees 

assessed on borrowers, including fees 

on late payments, fees for obtaining 

force-placed insurance, and fees for 

services, such as responding to 

telephone inquiries, processing 

telephone payments, and providing 

payoff statements.15 As a result, 

servicers have an incentive to look for 

opportunities to impose fees on 

borrowers to enhance revenues. 

These attributes of the servicing 

market created problems for certain 

borrowers even prior to the financial 

crisis. For example, borrowers 

experienced problems with mortgage 

servicers even during regional mortgage 

market downturns that preceded the 

financial crisis.16 There is evidence that 

borrowers were subjected to improper 

fees that servicers had no reasonable 

basis to impose, improper force-placed 

insurance practices, and improper 

foreclosure and bankruptcy practices.17

When the financial crisis erupted, 

many servicers—and especially the 

larger servicers with their scale business 

models—were ill-equipped to handle 

the high volumes of delinquent 

mortgages, loan modification requests, 

and foreclosures they were required to 

process. Mortgage loan delinquency 

rates nearly doubled between 2007 and 

2009 from 5.4 percent of first-lien 

mortgage loans to 9.4 percent of firstlien mortgage loans.18 Many servicers 

lacked the infrastructure, trained staff, 

controls, and procedures needed to 

manage effectively the flood of 

delinquent mortgages they were forced 

to handle.19 One study of complaints to 

the HOPE Hotline reported that over 

half of the complaints (27,000 out of 

48,000) were from borrowers who could 

not reach their servicers and obtain 

information about the status of 

applications they had submitted for 

options to avoid foreclosure.20

Consumer harm has manifested in 

many different areas, and major 

servicers have entered into significant 

settlement agreements with Federal and 

State governmental authorities. For 

example, in April 2011, the Office of the 

Comptroller of the Currency (OCC) and 

the Board of Governors of the Federal 

Reserve System (Board), following onsite reviews of foreclosure processing at 

14 federally regulated mortgage 

servicers, found significant deficiencies 

at each of the servicers reviewed. As a 

result, the OCC and the Board 

undertook formal enforcement actions 

against several major servicers for 

unsafe and unsound residential 

mortgage loan servicing practices.21

These enforcement actions generally 

focused on practices relating to (1) filing 

of foreclosure documents without, for 

example, proper affidavits or 

notarizations; (2) failing to always 

ensure that loan documents were 

properly endorsed or assigned and, if 

necessary, in the possession of the 

appropriate party at the appropriate 

time; (3) failing to devote sufficient 

financial, staffing, and managerial 

resources to ensure proper 

administration of foreclosure processes; 

(4) failing to devote adequate oversight, 

internal controls, policies and 

procedures, compliance risk 

management, internal audit, third-party 

management, and training to foreclosure 

processes; and (5) failing to oversee 

sufficiently outside counsel and other 

third-party providers handling 

foreclosure-related services.22

Other investigations of servicers have 

found similar problems. For example, 

the Government Accountability Office 

(GAO) has found pervasive problems in 

broad segments of the mortgage 

servicing industry impacting delinquent 

borrowers, such as servicers who have 

misled, or failed to communicate with, 

borrowers, lost or mishandled borrowerprovided documents supporting loan 

modification requests, and generally 

provided inadequate service to 

delinquent borrowers. It has been 

recognized in Inspector General reports, 

and the Bureau has learned from 

outreach with mortgage investors, that 

servicers may be acting to maximize 

their self-interests in the handling of 

delinquent borrowers, rather than the 

interests of owners or assignees of 

mortgage loans.23

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10907 

Transfer of Mortgage Servicing Rights from Bank of 

America to High Touch Servicers, at 12 (Sept. 18, 

2012) (‘‘FHA OIG MSR Report’’). The Inspector 

General for FHFA observed that ‘‘Fannie Mae may 

have had (what one of its executives described as) 

a ‘misalignment of interests’ with its servicers. As 

guarantor or loan holder, Fannie Mae could face 

significant losses from a default. However, a 

servicer earns only a fraction of a percent of the 

unpaid balance of a mortgage it services and, thus, 

the fees derived from any particular loan may not— 

at least for the servicer—provide adequate incentive 

to undertake anything more than the bare minimum 

of effort in order to prevent a default. This will 

typically include sending out delinquency notices 

to borrowers who have not made timely payments, 

telephoning delinquent borrowers, and, ultimately, 

initiating foreclosure proceedings.’’ 

24For example, Fannie Mae rewards servicers that 

provide high levels of customer service by 

compensating them through (1) base servicing fees, 

(2) incentive payments for mortgage modifications, 

and (3) a performance payment based on the 

servicer’s success as contrasted with that of a 

benchmark portfolio. See FHA OIG MSR Report at 

12. 

25See U.S. Consumer Fin. Prot. Bureau, Final 

Report of the Small Business Review Panel on 

CFPB’s Proposals Under Consideration for Mortgage 

Servicing Rulemaking (Jun. 11, 2012) (‘‘Small 

Business Review Panel Report’’), available at http:// 

www.regulations.gov/#!documentDetail;D=CFPB2012-0033-0002. 

26Oklahoma elected not to participate in the 

National Mortgage Settlement and executed a 

separate settlement with the servicers that are 

parties to the National Mortgage Settlement. See 

State of Oklahoma, Oklahoma Mortgage Settlement 

Fact Sheet (Feb. 9, 2012), available at http:// 

www.oag.ok.gov/oagweb.nsf/0/2737eec

87426c427862579c10003c950/$FILE/

Oklahoma%20Mortgage%20Settlement%

20FAQs.pdf (last accessed Jan. 10, 2013). 

27The National Mortgage Settlement is available 

at: http://www.nationalmortgagesettlement.com/. 

The five servicers subject to the settlement are Bank 

of America, JP Morgan Chase, Wells Fargo, 

CitiMortgage, and Ally/GMAC. 

28See Attys. Gen., National Mortgage Settlement. 

29See Press Release, Fed. Res. Bd., Federal 

Reserve Board releases action plans and 

engagement letter to correct deficiencies in 

residential mortgage loan servicing and foreclosure 

processing (May 24, 2012), available at http:// 

www.federalreserve.gov/newsevents/press/ 

enforcement/20120524a.htm; Press Release, Fed. 

Res. Bd., Federal Reserve Board releases action 

plans for supervised financial institutions to correct 

deficiencies in residential mortgage loan servicing 

and foreclosure processing (Feb. 27, 2012), 

available at http://www.federalreserve.gov/

newsevents/press/enforcement/20120227a.htm; 

Press Release, Office of the Comptroller of the 

Currency, OCC Takes Enforcement Action Against 

Eight Servicers for Unsafe and Unsound 

Foreclosure Practices (Apr. 13, 2011), available at 

http://www.occ.treas.gov/news-issuances/newsreleases/2011/nr-occ-2011-47.html. 

30See Fed. Res. Bd., Federal Reserve Board 

releases action plans and engagement letter to 

correct deficiencies in residential mortgage loan 

servicing and foreclosure processing (May 24, 

2012), available at http://www.federalreserve.gov/ 

newsevents/press/enforcement/20120524a.htm. 

31See Press Release, Fed. Res. Bd., Federal 

Reserve Board releases action plans and 

engagement letter to correct deficiencies in 

residential mortgage loan servicing and foreclosure 

processing (May 24, 2012), available at http:// 

www.federalreserve.gov/newsevents/press/ 

enforcement/20110413a.htm; Press Release, Fed. 

Res. Bd., Federal Reserve Board releases action 

plans for supervised financial institutions to correct 

deficiencies in residential mortgage loan servicing 

and foreclosure processing (Feb. 27, 2012), available 

at http://www.federalreserve.gov/newsevents/press/ 

enforcement/20120227a.htm; Press Release, Office 

of the Comptroller of the Currency, OCC Takes 

Enforcement Action Against Eight Servicers for 

Unsafe and Unsound Foreclosure Practices (Apr. 

13, 2011), available at http://www.occ.gov/newsissuances/news-releases/2011/nr-occ-2011-47.html. 

32New York State Department of Financial 

Services, Explanatory All Institutions Letter 

(October 7, 2012), available at http:// 

www.dfs.ny.gov/legal/regulations/emergency/ 

banking/ar419lt.htm (last accessed Dec. 7, 2012). 

33 3 N.Y.C.R.R. 419.1 et seq. 

The mortgage servicing industry, 

however, is not monolithic. Some 

servicers provide high levels of 

customer service. Some of these 

servicers are compensated by investors 

in a way that incentivizes them to 

provide this level of service in order to 

optimize investor outcomes.24 Other 

servicers provide high levels of 

customer service because they are 

servicing loans of their own retail 

customers within their local community 

or (in the case of credit unions) 

membership base. These servicers seek 

to provide other products and services 

to consumers—and to others within the 

community or membership base—and 

thus have an interest in preserving their 

reputations and relationships with their 

consumers. For example, as discussed 

further below, small servicers that the 

Bureau consulted as part of a process 

required under the Small Business 

Regulatory Enforcement Fairness Act of 

1996 (SBREFA) described their 

businesses as requiring a ‘‘high touch’’ 

model of customer service both to 

ensure loan performance and maintain a 

strong reputation in their local 

communities.25

B. The National Mortgage Settlement 

and Other Regulatory Requirements 

In response to the unprecedented 

financial crisis and pervasive problems 

in mortgage servicing, including the 

systemic violation of State foreclosure 

laws by many of the largest servicers, 

State and Federal regulators have 

engaged in a number of individual 

servicing related enforcement and 

regulatory actions over the last few 

years and have begun discussions about 

comprehensive national standards. 

For example, the Federal government, 

joined by 49 State Attorneys General,26

entered into settlements with the 

nation’s five largest servicers in 

February 2012 (the National Mortgage 

Settlement).27 Exhibit A to each of the 

settlements is a Settlement Term Sheet, 

which sets forth standards that each of 

the five largest servicers must follow to 

comply with the terms of the 

settlement.28 The settlement standards 

contained in the Settlement Term Sheet 

are sub-divided into the following eight 

categories: (1) Foreclosure and 

bankruptcy information and 

documentation; (2) third-party provider 

oversight; (3) bankruptcy; (4) loss 

mitigation; (5) protections for military 

personnel; (6) restrictions on servicing 

fees; (7) force-placed insurance; and (8) 

general servicer duties and prohibitions. 

Apart from the National Mortgage 

Settlement, Federal regulatory agencies 

have also issued guidance on mortgage 

servicing and loan modifications,29

conducted coordinated reviews of the 

nation’s largest servicers,30 and taken 

enforcement actions against individual 

companies.31 Further, the Bureau and 

other Federal agencies have been 

engaged since spring 2011 in informal 

discussions about the potential 

development of national mortgage 

servicing standards through interagency 

regulations and guidance. 

Servicers are currently required to 

navigate overlapping requirements 

governing their servicing 

responsibilities. Servicers must comply 

with requirements established by 

owners or assignees of mortgage loans. 

These include, as applicable, (1) 

servicing guidelines required by Fannie 

Mae, Freddie Mac, and Ginnie Mae; (2) 

government insured program guidelines 

issued by the Federal Housing 

Administration (FHA), Department of 

Veterans Affairs (VA), and the Rural 

Housing Service; (3) contractual 

agreements with investors (such as 

pooling and servicing agreements and 

subservicing contracts); and (4) bank or 

institution policies. 

Servicers are also required to consider 

the impact of State and even local 

regulation on mortgage servicing. 

Significantly, New York, California, and 

Oregon have all adopted varying 

statutory or regulatory restrictions on 

mortgage servicers. For example, the 

Superintendent of Banks of the State of 

New York has repeatedly adopted shortterm emergency regulations governing 

mortgage servicers on a continuous 

basis since July 2010.32 These 

regulations impose obligations on 

servicers with respect to, among other 

things, consumer complaints and 

inquiries, statements of accounts, 

crediting of payments, payoff balances, 

and loss mitigation procedures.33 The 

California Homeowner Bill of Rights, 

which was enacted in 2012, imposes 

requirements on servicers with respect 

to evaluations of borrowers for loss 

mitigation options before various 

foreclosure documents may be filed for 

California’s non-judicial foreclosure 

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34See Cal. Civ. Code § 2923.6. 

35OAR 137–020–0805. Notably, Oregon’s 

regulations initially implemented mortgage 

servicing requirements with respect to open-end 

lines of credit (home equity plans) and, further, 

required servicers to comply with GSE guidelines 

for loan modifications. Oregon suspended these 

requirements and reissued the rule as OAR 137– 

020–0805 on the basis that such suspension was 

necessary to facilitate compliance. See In the matter 

of: Suspension of OAR 137–020–0800 and 

Adoption of OAR 137–020–0805 (February 15, 

2012), available at http://www.oregonmla.org/

WebsiteAttachments/

Misc%20Events%20Attachments/OAR%20137-020- 

0805%202%2015%2012%20AG%20Servicing%

20Rules%20(00540177).pdf (last accessed Jan. 6, 

2013). 

36See Press Release, Massachusetts Division of 

Banks Proposes New Standards for Mortgage 

Servicing (Nov. 8, 2012), available at http:// 

www.mass.gov/ocabr/docs/dob/standards-for-mortservicing2012.pdf (last accessed Jan. 6, 2013). 

37See 12 CFR 1026.36(c). 

38 52 FR 48665 (Dec. 24, 1987). 

39 74 FR 43232, 43269 (Aug. 26, 2009) (citing 52 

FR 48665, 48668 (Dec. 24, 1987)). 

40 74 FR 43232, 43272. 

41 73 FR 44522 (July 30, 2008). 

process.34 Further, Oregon implemented 

regulations on mortgage servicers not to 

engage in unfair or deceptive conduct 

by: assessing fees for payments made on 

or before a payment due date; assessing 

or collecting fees not authorized by a 

security instrument or mortgage, 

misrepresenting information relating to 

a loan modification or set forth in an 

affidavit, declaration, or other sworn 

statement detailing a borrower’s default 

and the servicer’s right to foreclose; 

failing to comply with certain 

provisions of RESPA; or failing to deal 

with a borrower in good faith.35 Further, 

Massachusetts has recently proposed 

new regulations to protect consumers 

with respect to mortgage servicing 

practices, including with respect to loss 

mitigation procedures.36

C. TILA and Regulation Z 

In 1968, Congress enacted TILA, 15 

U.S.C. 1601 et seq., based on findings 

that the informed use of credit resulting 

from consumers’ awareness of the cost 

of credit would enhance economic 

stability and competition among 

consumer credit providers. One of the 

purposes of TILA is to promote the 

informed use of consumer credit by 

requiring disclosures about its costs and 

terms. TILA requires additional 

disclosures for loans secured by 

consumers’ homes and permits 

consumers to rescind certain 

transactions secured by their principal 

dwellings when the required disclosures 

are not provided. Section 105(a) of TILA 

directs the Bureau (and formerly 

directed the Board) to prescribe 

regulations to carry out TILA’s purposes 

and specifically authorizes the Bureau, 

among other things, to issue regulations 

that contain such additional 

requirements, classifications, 

differentiations, or other provisions, or 

that provide for such adjustments and 

exceptions for all or any class of 

transactions, that in the Bureau’s 

judgment are necessary or proper to 

effectuate the purposes of TILA, 

facilitate compliance with TILA, or 

prevent circumvention or evasion 

thereof. See 15 U.S.C. 1604(a). 

General rulemaking authority for 

TILA transferred to the Bureau in July 

2011, other than for certain motor 

vehicle dealers in accordance with 

Dodd-Frank Act section 1029, 12 U.S.C. 

5519. Pursuant to the Dodd-Frank Act 

and TILA, as amended, the Bureau 

published for public comment an 

interim final rule establishing a new 

Regulation Z, 12 CFR part 1026, 

implementing TILA (except with respect 

to persons excluded from the Bureau’s 

rulemaking authority by section 1029 of 

the Dodd-Frank Act). 76 FR 79768 (Dec. 

22, 2011). This rule did not impose any 

new substantive obligations but did 

make technical and conforming changes 

to reflect the transfer of authority and 

certain other changes made by the 

Dodd-Frank Act. The Bureau’s 

Regulation Z took effect on December 

30, 2011. The Official Interpretation 

interprets the requirements of the 

regulation and provides guidance in 

applying the rules to specific 

transactions. See 12 CFR part 1026, 

Supp. I. 

Prior to the adoption of the DoddFrank Act, TILA set forth requirements 

on creditors that were implemented by 

servicers, including disclosures 

regarding interest rate adjustments on 

adjustable-rate mortgage loans. 

Regulation Z, which implements TILA, 

was amended by the Board to impose 

certain limited requirements directly on 

servicers, such as requirements to credit 

payments timely and provide payoff 

balances, as well as a prohibition on 

pyramiding of late fees.37

ARM rate adjustment disclosures. The 

Board adopted the rule that is current 

§ 1026.20(c) in 1987, as part of a larger 

revision of Regulation Z.38 In 2009, the 

Board proposed to revise regulations 

governing ARM disclosures as part of a 

larger revision of closed-end provisions 

in Regulation Z (2009 Closed-End 

Proposal). In that proposal, the Board 

said that, in 1987, it set the minimum 

time for providing notice of a rate 

adjustment at 25 days before the first 

payment at the new level is due to track 

the rules of the OCC and to provide 

creditors with flexibility in giving 

adjustment notices for a variety of 

ARMs.39 It also noted that, as of 2009, 

neither the OCC nor any other Federal 

financial institution supervisory agency 

had any comprehensive disclosure 

requirements for ARMs.40

Prompt crediting and payoff 

statements. In 2008 the Board published 

a final rule amending Regulation Z to 

establish new regulatory protections for 

consumers in the residential mortgage 

market from unfair, abusive, or 

deceptive lending and servicing 

practices.41 Among other protections, 

this rule established 12 CFR 226.36(c), 

prohibiting certain practices of servicers 

of consumer credit transactions secured 

by a consumers principal dwelling. This 

rule provided that no servicer shall: (1) 

Fail to credit a consumer’s periodic 

payment as of the date received; (2) 

impose a late fee or delinquency charge 

where the late fee or delinquency charge 

is due only to a consumer’s failure to 

include in a current payment a late fee 

or delinquency charge imposed on 

earlier payments; or (3) fail to provide 

an accurate payoff statement within a 

reasonable time of request. 

D. The Dodd-Frank Act 

The Dodd-Frank Act imposes certain 

new requirements related to mortgage 

servicing. As set forth above, some of 

these new requirements are 

amendments to TILA addressed in this 

final rule and others are amendments to 

RESPA, addressed in the 2013 RESPA 

Servicing Final Rule. Sections 1418, 

1420, and 1464 amend TILA to include 

protections with respect to mortgage 

servicing. There are three new mortgage 

servicing requirements under TILA. 

First, for closed-end credit transactions 

secured by a consumer’s principal 

residence, section 1418 of the DoddFrank Act adds a new section 128A to 

TILA. 15 U.S.C. 1638a. TILA section 

128A states that, for hybrid ARMs with 

a fixed interest rate for an introductory 

period that adjusts or resets to an 

adjustable interest rate at the end of 

such period, a notice must be provided 

six months prior to the initial 

adjustment of the interest rate for 

closed-end credit transactions secured 

by a consumer’s principal residence. 

Section 1418 of the Dodd-Frank Act 

permits the Bureau to extend this 

requirement to ARMs that are not 

hybrid ARMs. 

Second, section 1420 of the DoddFrank Act, which adds section 128(f) to 

TILA, requires the creditor, assignee, or 

servicer of any residential mortgage loan 

to transmit to the consumer, for each 

billing cycle, a periodic statement that 

sets forth certain specified information 

in a conspicuous and prominent 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10909 

42The Small Business Regulatory Enforcement 

Fairness Act of 1996 requires the Bureau to convene 

a Small Business Review Panel before proposing a 

rule that may have a significant economic impact 

on a substantial number of small entities. See 

Public Law 104–121, tit. II, 110 Stat. 847, 857 (1996) 

(as amended by Pub. L. 110–28, sec. 8302 (2007)). 

43See U.S. Consumer Fin. Prot. Bureau, Final 

Report of the Small Business Review Panel on 

CFPB’s Proposals Under Consideration for Mortgage 

Servicing Rulemaking (June 11, 2012) (‘‘Small 

Business Review Panel Final Report’’), available at 

http://www.consumerfinance.gov. 

44 ICF Int’l, Inc., Summary of Findings: Design 

and Testing of Mortgage Servicing Disclosures (Aug. 

2012) (‘‘Macro Report’’), available at http:// 

www.regulations.gov/#!documentDetail;D=CFPB2012-0033-0003. 

manner. 15 U.S.C. 1638(f). The statute 

also gives the Bureau the authority to 

require additional content to be 

included in the periodic statement. The 

statute provides an exemption to the 

periodic statement requirement for 

fixed-rate loans where the consumer is 

given a coupon book containing 

substantially the same information as 

the statement. 

Third, section 1464 of the Dodd-Frank 

Act adds sections 129F and 129G to 

TILA, which generally codifies existing 

Regulation Z requirements for the 

prompt crediting of mortgage payments 

received by servicers in connection with 

consumer credit transactions secured by 

a consumer’s dwelling and requirements 

for a creditor or servicer to send 

accurate and timely responses to 

consumer requests for payoff amounts 

for home loans. 15 U.S.C. 1639f, 1639g. 

Section 1022(b)(1) of the Dodd-Frank 

Act authorizes the Bureau to prescribe 

rules ‘‘as may be necessary or 

appropriate to enable the Bureau to 

administer and carry out the purposes 

and objectives of the Federal consumer 

financial laws, and to prevent evasions 

thereof[.]’’ 12 U.S.C. 5512(b)(1). TILA 

and title X of the Dodd-Frank Act are 

Federal consumer financial laws. 

Accordingly, the Bureau proposed to 

exercise its authority under section 

1022(b) of the Dodd-Frank Act to 

prescribe rules to carry out the purposes 

of TILA and title X and prevent evasion 

of those laws. 

III. Summary of the Rulemaking 

Process 

A. Outreach and Consumer Testing 

The Bureau has conducted extensive 

outreach in developing the Final 

Servicing Rules. Prior to issuing the 

Proposed Servicing Rules on August 10, 

2012, Bureau staff met with consumers, 

consumer advocates, mortgage servicers, 

force-placed insurance carriers, industry 

trade associations, other Federal 

regulatory agencies, and other interested 

parties to discuss various aspects of the 

statute, servicing industry operations, 

and consumer harm impacts. Outreach 

included meetings with numerous 

individual servicers to understand their 

operations and the potential benefits 

and burdens of the proposed mortgage 

servicing rules. As discussed above and 

in connection with section 1022 of the 

Dodd-Frank Act below, the Bureau has 

also consulted with relevant Federal 

regulators both regarding the Bureau’s 

specific rules and the need for and 

potential contents of national mortgage 

servicing standards in general. 

Further, the Bureau solicited input 

from small servicers through a Small 

Business Review Panel (Small Business 

Review Panel) with the Chief Counsel 

for Advocacy of the Small Business 

Administration (Advocacy) and the 

Administrator of the Office of 

Information and Regulatory Affairs 

within the Office of Management and 

Budget (OMB).42 The Small Business 

Review Panel’s findings and 

recommendations are contained in the 

Small Business Review Panel Report.43

The Bureau has adopted 

recommendations provided by the 

participants on the Small Business 

Review Panel and includes below a 

discussion of such recommendations in 

connection with the applicable 

requirement. 

Further, prior to the issuing the 

Proposed Servicing Rules on August 10, 

2012, the Bureau engaged ICF Macro 

(Macro), a research and consulting firm 

that specializes in designing disclosures 

and consumer testing, to conduct oneon-one cognitive interviews regarding 

disclosures connected with mortgage 

servicing. During the first quarter of 

2012, the Bureau and Macro worked 

closely to develop and test disclosures 

that would satisfy the requirements of 

the Dodd-Frank Act and provide 

information to consumers in a manner 

that would be understandable and 

useful. These disclosures related the 

ARM interest rate adjustment notices 

and the periodic statement disclosure 

set forth in this rule as well as the 

forced-placed insurance notices set forth 

in the 2013 RESPA Servicing Final Rule. 

Macro conducted three rounds of oneon-one cognitive interviews with a total 

of 31 participants in the Baltimore, 

Maryland metro area (Towson, 

Maryland), Memphis, Tennessee, and 

Los Angeles, California. Participants 

were all consumers who held a 

mortgage loan and represented a range 

of ages and education levels. Efforts 

were made to recruit a significant 

number of participants who had trouble 

making mortgage payments in the last 

two years. During the interviews, 

participants were shown disclosure 

forms for periodic statements, ARM 

interest rate adjustment notices, and 

force-placed insurance notices. 

Participants were asked specific 

questions to test their understanding of 

the information presented in each of the 

disclosures, how easily they could find 

various pieces of information presented 

in each of the disclosures, and how they 

would use the information presented in 

each of the disclosures. The disclosures 

were revised after each round of testing. 

After the Bureau issued the Proposed 

Servicing Rules, Macro conducted a 

fourth round of one-on-one cognitive 

interviews with eight participants in 

Philadelphia, Pennsylvania. Again, 

participants were consumers who held 

a mortgage loan and represented a range 

of ages and education levels. During the 

interviews, participants were asked to 

review two different versions of a 

servicing transfer notice and early 

intervention model clauses, which 

relate to requirements the Bureau is 

implementing under RESPA. 

Participants were asked specific 

questions to test their reaction to and 

understanding of the content of the 

servicing transfer notice and the early 

intervention model clauses. This 

process was repeated for each of the five 

clauses being tested. Specific findings 

from the consumer testing are discussed 

in detail throughout where relevant.44

One commenter, identifying itself as a 

research organization, observed that the 

consumer testing the Bureau has 

conducted with respect to the mortgage 

servicing disclosures follows the path of 

evidence-based decision-making. This 

commenter asserted, however, that the 

Bureau should consider undertaking 

steps in evaluating the proposed forms, 

including possibly undertaking 

additional testing because other 

consumer financial disclosures, 

including the forms the Bureau 

proposed with the 2012 TILA–RESPA 

Proposal, have gone through more 

testing. At the same time, however, the 

commenter observed that the decreased 

level of testing might be justified on 

various grounds, such as, for example, 

the fact that studies have found that 

small numbers of individuals can 

identify the vast majority of usability 

problems, the fact that the testing was 

done with participants familiar with 

mortgages, and the fact that the Bureau 

is working on a tight schedule to 

finalize rules by January 21, 2013 when 

statutory provisions would go into 

effect. 

The Bureau believes that the testing it 

conducted is appropriate. The Bureau 

observes that the forms the Bureau 

proposed as part of the 2012 TILA– 

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45The Bureau posted these materials on its Web 

site and invited the public to email remarks on the 

materials. Press Release, U.S. Consumer Fin. Prot. 

Bureau, Consumer Financial Protection Bureau 

Outlines Borrower-Friendly Approach to Mortgage 

Servicing (Apr. 9, 2012), available at http:// 

www.consumerfinance.gov/pressreleases/consumerfinancial-protection-bureau-outlines-borrowerfriendly-approach-to-mortgage-servicing/ (last 

accessed Jan. 6, 2013). 

46This written feedback is attached as appendix 

A to the Small Business Review Panel Report. 

RESPA Proposal contained significantly 

more complicated financial information 

than the forms finalized as part of the 

current rulemakings. Additionally, the 

2012 TILA–RESPA Proposal, when 

finalized, would substantially change 

consumers’ mortgage shopping 

experience; by contrast, the Final 

Mortgage Servicing Rules are intended 

to improve, but not substantially alter, 

consumers’ experience with their 

mortgage servicers. These differences, in 

terms of level of complication and 

degree of change from current practice, 

justify the different levels of resources 

the Bureau allocated to the two different 

testing projects. Lastly, Macro’s findings 

show that there was notable consistency 

across the different rounds of testing in 

terms of participant comprehension 

that, in combination with the Bureau’s 

expertise and knowledge of consumer 

understanding and behavior, gave the 

Bureau confidence to rely on the forms 

that were developed and refined 

through testing as a basis for the model 

forms included in the Final Servicing 

Rules. 

The Bureau further emphasizes that it 

is not relying solely on the consumer 

testing to determine that any particular 

disclosure will be effective. The Bureau 

is also relying on its knowledge of, and 

expertise in, consumer understanding 

and behavior, as well as principles of 

effective disclosure design. 

B. Small Business Regulatory 

Enforcement Fairness Act 

As required by SBREFA, the Bureau 

convened a Small Business Review 

Panel to assess the impact of the 

possible rules on small servicers and to 

help the Bureau determine to what 

extent it may be appropriate to consider 

adjusting these standards for small 

servicers, to the extent permitted by 

law. Thus, on April 9, 2012, the Bureau 

provided Advocacy with the formal 

notification and other information 

required under section 609(b)(1) of the 

Regulatory Flexibility Act (RFA) to 

convene the panel. 

In order to obtain feedback from small 

servicers, the Bureau, in consultation 

with Advocacy, identified five 

categories of small entities that may be 

subject to the proposed rule: 

Commercial banks/savings institutions, 

credit unions, non-depositories engaged 

primarily in lending funds with real 

estate as collateral, non-depositories 

primarily engaged in loan servicing, and 

certain non-profit organizations. The 

Bureau, in consultation with Advocacy, 

selected 16 representatives to 

participate in the Small Business 

Review Panel process from the 

categories of entities that may be subject 

to the Proposed Servicing Rules. The 

participants included representatives 

from each of the categories identified by 

the Bureau and comprised a diverse 

group of individuals with regard to 

geography and type of locality (i.e., 

rural, urban, suburban, or metropolitan 

areas), as described in chapter 7 of the 

Small Business Review Panel Report. 

On April 10, 2012, the Bureau 

convened the Small Business Review 

Panel. In order to collect the advice and 

recommendations of Small Entity 

Representatives, the Panel held an 

outreach meeting/teleconference on 

April 24, 2012 (Panel Outreach 

Meeting). To help the Small Entity 

Representatives prepare for the Panel 

Outreach Meeting, the Panel circulated 

briefing materials that summarized the 

proposals under consideration at that 

time, posed discussion issues, and 

provided information about the SBREFA 

process generally.45 All 16 small entities 

participated in the Panel Outreach 

Meeting either in person or by 

telephone. The Small Business Review 

Panel also provided the Small Entity 

Representatives with an opportunity to 

submit written feedback until May 1, 

2012. In response, the Small Business 

Review Panel received written feedback 

from five of the representatives.46

On June 11, 2012, the Small Business 

Review Panel submitted to the Director 

of the Bureau the written Small 

Business Review Panel Report, which 

includes the following: Background 

information on the proposals under 

consideration at the time; information 

on the types of small entities that would 

be subject to those proposals and on the 

participants who were selected to advise 

the Small Business Review Panel; a 

summary of the Panel’s outreach to 

obtain the advice and recommendations 

of those participants; a discussion of the 

comments and recommendations of the 

participants; and a discussion of the 

Small Business Review Panel findings, 

focusing on the statutory elements 

required under section 603 of the RFA, 

5 U.S.C. 609(b)(5). 

In connection with issuing the 

Proposed Servicing Rules, the Bureau 

carefully considered the feedback from 

the small entities and the findings and 

recommendations in the Small Business 

Review Panel Report. The section-bysection analyses for the Final Servicing 

Rules discuss this feedback and the 

specific findings and recommendations 

of the Small Business Review Panel, as 

applicable. The SBREFA process 

provided the Small Business Review 

Panel and the Bureau with an 

opportunity to identify and explore 

opportunities to mitigate the burden of 

the rule on small entities while 

achieving the rule’s purposes. It is 

important to note, however, that the 

Small Business Review Panel prepared 

the Small Business Review Panel Report 

at a preliminary stage of the proposal’s 

development and that the report—in 

particular, the findings and 

recommendations—should be 

considered in that light. Any options 

identified in the Small Business Review 

Panel Report for reducing the proposed 

rule’s regulatory impact on small 

entities were expressly subject to further 

consideration, analysis, and data 

collection by the Bureau to ensure that 

the options identified were practicable, 

enforceable, and consistent with 

RESPA, TILA, the Dodd-Frank Act, and 

their statutory purposes. 

C. Summary of the Proposed Servicing 

Rule 

The 2012 TILA Servicing Proposal 

would have amended Regulation Z to 

implement requirements relating to 

interest rate adjustment disclosures, 

periodic mortgage statements, payoff 

statements, and prompt crediting of 

payments. The 2012 TILA Servicing 

Proposal would have amended current 

§ 1026.20(c) to revise the timeframe for 

providing the ARM adjustment notice 

from the current requirement of between 

25 and 120 days before the first payment 

at a new level is due to between 60 and 

120 days. The proposed rule also would 

have grandfathered existing ARMs that 

contractually will not be able to comply 

with the new timing, i.e., those with 

look-back periods of less than 45 days. 

The proposed rule also would have 

required the disclosure required by 

current § 1026.20(c) to include 

additional information. Such additional 

information would have included: (1) A 

statement that the consumer’s interest 

rate is scheduled to adjust, a statement 

that the adjustment may change the 

mortgage payment, the time period the 

current interest rate has been in effect, 

and the dates of the future rate 

adjustments, (2) the date when the new 

payment is due after the adjustment, (3) 

any interest rate or payment limits; any 

unapplied carryover interest and the 

earliest date it could be applied, (4) 

additional amortization information for 

negatively-amortizing and interest-only 

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47Some commenters provided comments strictly 

with respect to the rulemaking process. One trade 

association commented that small servicers that 

participated in the Small Business Review Panel 

process did not have adequate time to prepare for 

the panel discussion and provide appropriate data, 

while another trade association commented that 

because the Bureau’s proposed rules are lengthy 

and because some rules have overlapping comment 

periods, each of which has been limited to 60 days, 

the trade association has had difficulty dedicating 

staff to comment on the Bureau’s proposals. As set 

forth in this section, the Bureau has conducted the 

rulemaking process, including the SBREFA process 

and the public comment period, in a manner that 

provided as much flexibility as possible to receive 

feedback from the SBREFA participants and public 

commenters in light of the deadlines required for 

the rulemaking. The Bureau assisted the SBA in 

calls and outreach with small entity participants to 

obtain any comments not set forth during the panel 

outreach with the small entity representatives. 

Further, with respect to public comments, the 

Bureau believes that the public had a meaningful 

opportunity to comment, which is evidenced by the 

significant number of comments received and their 

length. The Bureau offered 61 days from August 10, 

2012 through October 9, 2012, for comment; and 22 

days after the proposal was published in the 

Federal Register on September 17. 

loans, and (5) the amount and 

expiration date of any prepayment 

penalty. 

The proposed rule would also have 

implemented section 1418 of the DoddFrank Act by requiring creditors, 

assignees, or servicers to provide a new 

one-time notice to consumers six to 

seven months prior to the first time the 

interest rate of their adjustable-rate 

mortgages adjusts. The initial interest 

rate adjustment notices proposed in 

§ 1026.20(d) would have included much 

of the same information listed above for 

proposed § 1026.20(c). The proposed 

notice in § 1026.20(d) would have 

disclosed additional information, 

including a list of alternatives 

consumers may pursue, including 

refinancing, renegotiation of loan terms, 

payment forbearance, and preforeclosure sales; contact information 

for the appropriate State housing 

finance agency; and information on how 

to access a list of government-certified 

counseling agencies and programs. The 

proposed rule would have included 

model and sample forms for the 

requirements in § 1026.20(c) and (d). 

The 2012 TILA Servicing Proposal 

further would have required creditors, 

assignees, and servicers to provide 

consumers with a periodic statement. 

The proposed rule would have 

established requirements for the timing, 

form, content, and layout of the 

statement. The proposed rule also 

would have included sample forms. The 

proposed rule would have required that 

certain related pieces of information 

must be grouped together on the 

periodic statement. Moreover, the 

proposed rule would have clarified how 

periodic statements should be disclosed 

in particular situations. For example, 

the proposed rule would have clarified 

the disclosure of partial payments, 

funds held in a suspense or unapplied 

funds account, and payments for 

payment-option loans. Further, the 

proposed rule would have required that 

delinquent consumers receive important 

information in several places on the 

periodic statement, such as information 

regarding the overdue amount and any 

fees applied to the consumer’s account. 

Finally, the proposed rules would have 

exempted certain products and servicers 

from the periodic statement 

requirement. Fixed-rate loans with 

coupon books that meet certain 

requirements, timeshares, and reverse 

mortgages would have been exempt 

from the periodic statement 

requirements. Further, small servicers as 

defined in the proposed rule (that is, 

servicers that service 1,000 mortgage 

loans or less and only service mortgage 

loans that the servicer or an affiliate 

owns or originated) would have been 

exempt from the periodic statement 

requirement. 

The 2012 TILA Servicing Proposal 

would have imposed requirements on 

servicers with respect to the handling of 

partial payments from consumers. The 

proposed rule would have limited the 

application of the current prompt 

crediting provision, existing 

§ 1026.36(c)(1)(i), to full contractual 

payments (as opposed to all payments). 

The proposed rule would have added a 

new provision, § 1026.36(c)(1)(ii), to 

address the handing of partial payments 

(anything less than a full contractual 

payment). The proposed rule would 

have implemented requirements on 

servicers to provide payoff statements, 

with modifications relating to the scope 

and timing of the requirement, and a 

limitation to written requests for payoff 

statements. Further, the proposed rule 

would have reorganized the 

requirements in § 1026.36(c). 

D. Overview of the Comments Received 

The Bureau received approximately 

300 comments on the Proposed 

Servicing Rules. The comments came 

from individual consumers, consumer 

advocates, community banks, large bank 

holding companies, secondary market 

participants, credit unions, non-bank 

servicers, State and national trade 

associations for financial institutions in 

the mortgage business, local and 

national community groups, Federal 

and State regulators, academics, and 

others. Commenters provided feedback 

on all aspects of the Proposed Servicing 

Rules. Most commenters tended to focus 

on specific aspects of the proposals. 

Accordingly, in general, the comments 

are discussed below in the section-bysection analysis. 

The majority of comments were 

submitted by mortgage servicers, 

industry groups representing servicers 

and businesses involved in the servicing 

industry. Large banks, community banks 

and credit unions, non-bank servicers, 

and industry trade associations 

submitted nearly all of these comments. 

The Small Business Administration 

Office of Advocacy submitted a 

comment and the remaining comments 

were submitted by vendors and 

attorney’s representing industry 

interests. The Bureau also received a 

significant number of comments from 

consumer advocacy groups. The record 

also includes a 49-page comment by the 

Cornell e-Rulemaking Initiative 

synthesizing submissions of 144 

registered participants to Cornell’s 

Regulation Room project. Regulation 

Room is a pilot project designed to use 

different Web technologies and 

approaches to enhance public 

understanding and participation in 

Bureau rulemakings and to evaluate the 

advantages and disadvantages of these 

techniques. Finally, the Bureau also 

received comments from the Federal 

Housing Finance Agency, the GSEs, and 

from vendors and attorneys representing 

industry interests. 

Industry commenters and their trade 

associations also provided comments 

regarding the rulemaking process, and 

those comments are addressed here.47 In 

that regard, community banks and their 

trade associations stated that the Bureau 

should consider cumulative burden 

when writing regulations, setting 

comment deadlines, and effective dates. 

These commenters believed that the 

combination of the Bureau’s rules as 

well as the impact of Basel III 

requirements with respect to accounting 

for mortgage servicing rights in Tier I 

capital may cause disruptions across all 

mortgage market segments. A 

community bank trade association 

indicated that community banks are 

likely to feel the impact of the rules 

more acutely, as they cannot take 

advantage of economies of scale in 

mitigating the compliance burden. A 

community bank trade association 

stated that the Bureau should consider 

the wide diversity among servicer 

business models and adapt regulations 

to preserve diversity within the 

servicing industry. The commenter 

emphasized that community banks have 

strong reputation and performance 

incentives to ensure that consumers are 

provided a high level of service. 

A large bank and a number of trade 

association commenters stated that the 

Bureau should be cognizant of imposing 

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48 76 FR 27390 (May 11, 2011). 

requirements and standards potentially 

inconsistent with those required by 

settlement agreements, consent orders, 

and GSE or government insurance 

program requirements. One commenter 

stated that the Bureau should consider 

preempting State law mortgage servicing 

requirements to provide legal and 

regulatory certainty to industry 

participants that are evaluating the 

future desirability of maintaining 

servicing operations. A number of trade 

associations stated that the Bureau 

should not issue regulations that would 

impose requirements substantially 

similar to the National Mortgage 

Settlement on mortgage servicers that 

are not parties to the National Mortgage 

Settlement. 

The Bureau has considered each of 

these comments relating to the 

cumulative impact of mortgage 

regulation, including the mortgage 

servicing rules; the potential for 

inconsistent results with current 

servicing obligations, including State 

law and the National Mortgage 

Settlement; and comments regarding the 

diversity of servicing business models 

and servicer sizes. The Bureau’s 

consideration of those comments is 

reflected below in the section-by-section 

analysis with respect to various 

determinations made in finalizing the 

2012 TILA Servicing Proposal, 

including the determination to create 

clear requirements, the determination to 

maintain consistency with current 

servicing obligations, including those 

imposed by State law and the National 

Mortgage Settlement, and the 

consideration of exemptions for small 

servicers. 

With respect to preemption of state 

law, the Final Servicing Rules generally 

do not have the effect of prohibiting 

state law from affording borrowers 

broader consumer protections relating to 

mortgage servicing than those conferred 

under the Final Servicing Rules. 

However, in certain circumstances, the 

effect of specific requirements of the 

Final Servicing Rules is to preempt 

certain limited aspects of state law. 

Specifically, as set forth in the 2013 

RESPA Servicing Final Rule, 

§ 1024.41(f) bars a servicer from making 

the first notice or filing required for a 

foreclosure process unless a borrower is 

more than 120 days delinquent, 

notwithstanding that state law may 

permit any such filing. Further, 

§ 1024.33(d) incorporates a pre-existing 

provision in Regulation X that 

implements RESPA with respect to 

preemption of certain state law 

disclosures relating to mortgage 

servicing transfers. In other 

circumstances, the Bureau explicitly 

took into account existing standards 

(both State and Federal) and either built 

in flexibility or designed its rules to 

coexist with those standards. For 

example, as discussed in the 2013 

RESPA Servicing Final Rule, the Bureau 

took into account the loss mitigation 

timelines and ‘‘dual-tracking’’ 

provisions in the National Mortgage 

Settlement and the California 

Homeowner Bill of Rights and designed 

timelines that are consistent with those 

standards. Similarly, in designing its 

early intervention provision the Bureau 

included a statement that nothing in 

that provision shall require a servicer to 

make contact with a borrower in a 

manner that would be prohibited under 

applicable law. 

A number of commenters provided 

comments regarding language access 

and community blight. Two national 

consumer groups urged the Bureau to 

take action to remove barriers borrowers 

with limited English proficiency face 

with respect to understanding the terms 

of their mortgages because such barriers 

might make these borrowers more 

vulnerable to bad servicing practices. 

One national consumer group urged the 

Bureau to mandate translation of all 

notices, documents, and bills going to 

borrowers. Another national consumer 

group urged the Bureau to consider 

requiring servicers to provide 

disclosures and services in a borrower’s 

preferred language, noting that it 

represents a population that speaks 

more than 100 different dialects. 

Finally, one commenter suggests that 

the Bureau should not only mandate 

disclosures in other languages but also 

should require servicers to provide 

language-capable staff to assist 

borrowers with limited English skills. 

With respect to neighborhood blight, a 

coalition of consumer advocacy groups 

and a consumer advocate that 

participated in outreach with the 

Bureau commented that the Bureau 

should consider implementing 

regulations to manage neighborhood 

blight by requiring servicers to maintain 

real estate owned (REO) property to 

decent, safe, and sanitary standards 

capable of purchase by borrowers with 

FHA financing. 

Although some of these specific 

requests exceed the scope of the 

rulemaking, the Bureau takes seriously 

the important considerations of 

avoiding neighborhood blight and 

language access. The Bureau recognizes 

the challenges borrowers with limited 

English proficiency face in 

understanding the terms of their 

mortgage. The Bureau believes that 

servicers should communicate with 

borrowers clearly, including in the 

borrower’s native language, where 

possible, and especially when lenders 

advertise in the borrower’s native 

language. The Bureau conducted 

Spanish testing to support proposed 

rules and forms combining the TILA 

mortgage loan disclosure with the Good 

Faith Estimate (GFE) and statement 

required under RESPA. See 77 FR 

54843. That testing underscores both the 

value of disclosures in other languages 

but also the challenges in translating 

forms using English terms of art into 

other languages to assure that the 

foreign-language version of the form 

effectively communicates the required 

information to its readers. 

Although the Bureau has tested the 

disclosures it is adopting, it has not had 

the opportunity to test the disclosures in 

other languages. Accordingly, the 

Bureau is not imposing mandatory 

foreign language translation 

requirements or other language access 

requirements at this time with respect to 

the mortgage servicing disclosures and 

other requirements the Bureau is 

adopting. Although the Bureau declines 

at this time to implement requirements 

regarding language access, other than 

those currently in TILA, the Bureau will 

continue to consider language access 

generally in connection with developing 

disclosures and will consider further 

requirements on servicer 

communication with borrowers if 

appropriate. With respect to REO 

properties, the Bureau continues to 

consider whether regulations are 

appropriate to address the maintenance 

of properties owned by lenders and any 

potential resulting harm from 

community blight. 

E. Other Dodd-Frank Act MortgageRelated Rulemakings 

In addition to the Final Servicing 

Rules, the Bureau is adopting several 

other final rules and issuing one 

proposal, all relating to mortgage credit, 

to implement requirements of title XIV 

of the Dodd-Frank Act. The Bureau is 

also issuing a final rule and planning to 

issue a proposal jointly with other 

Federal agencies to implement 

requirements for mortgage appraisals in 

title XIV. Each of the final rules follows 

a proposal issued in 2011 by the Board 

or in 2012 by the Bureau alone or jointly 

with other Federal agencies. 

Collectively, these proposed and final 

rules are referred to as the Title XIV 

Rulemakings. 

• Ability to Repay: The Bureau 

recently issued a rule, following a May 

2011 proposal issued by the Board (the 

Board’s 2011 ATR Proposal),48 to 

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49 76 FR 11598 (Mar. 2, 2011). 

50 77 FR 49090 (Aug. 15, 2012). 

51 77 FR 55272 (Sept. 7, 2012). 

52Specifically, the Board of Governors of the 

Federal Reserve System, the Office of the 

Comptroller of the Currency, the Federal Deposit 

Insurance Corporation, the National Credit Union 

Administration, and the Federal Housing Finance 

Agency. 

53 77 FR 54722 (Sept. 5, 2012). 

54 77 FR 50390 (Aug. 21, 2012). 

55 77 FR 51116 (Aug. 23, 2012). 

56 77 FR 70105 (Nov. 23, 2012). 

implement provisions of the DoddFrank Act (1) requiring creditors to 

determine that a consumer has a 

reasonable ability to repay covered 

mortgage loans and establishing 

standards for compliance, such as by 

making a ‘‘qualified mortgage,’’ and (2) 

establishing certain limitations on 

prepayment penalties, pursuant to TILA 

section 129C as established by DoddFrank Act sections 1411, 1412, and 

1414. 15 U.S.C. 1639c. The Bureau’s 

final rule is referred to as the 2013 ATR 

Final Rule. Simultaneously with the 

2013 ATR Final Rule, the Bureau issued 

a proposal to amend the final rule 

implementing the ability-to-repay 

requirements, including by the addition 

of exemptions for certain nonprofit 

creditors and certain homeownership 

stabilization programs and a definition 

of a ‘‘qualified mortgage’’ for certain 

loans made and held in portfolio by 

small creditors (the 2013 ATR 

Concurrent Proposal). The Bureau 

expects to act on the 2013 ATR 

Concurrent Proposal on an expedited 

basis, so that any exceptions or 

adjustments to the 2013 ATR Final Rule 

can take effect simultaneously with that 

rule. 

• Escrows: The Bureau recently 

issued a rule, following a March 2011 

proposal issued by the Board (the 

Board’s 2011 Escrows Proposal),49 to 

implement certain provisions of the 

Dodd-Frank Act expanding on existing 

rules that require escrow accounts to be 

established for higher-priced mortgage 

loans and creating an exemption for 

certain loans held by creditors operating 

predominantly in rural or underserved 

areas, pursuant to TILA section 129D as 

established by Dodd-Frank Act sections 

1461. 15 U.S.C. 1639d. The Bureau’s 

final rule is referred to as the 2013 

Escrows Final Rule. 

• HOEPA: Following its July 2012 

proposal (the 2012 HOEPA Proposal),50

the Bureau recently issued a final rule 

to implement Dodd-Frank Act 

requirements expanding protections for 

‘‘high-cost mortgages’’ under the 

Homeownership and Equity Protection 

Act (HOEPA), pursuant to TILA sections 

103(bb) and 129, as amended by DoddFrank Act sections 1431 through 1433. 

15 U.S.C. 1602(bb) and 1639. The 

Bureau also is finalizing rules to 

implement certain title XIV 

requirements concerning 

homeownership counseling, including a 

requirement that lenders provide lists of 

homeownership counselors to 

applicants for federally related mortgage 

loans, pursuant to RESPA section 5(c), 

as amended by Dodd-Frank Act section 

1450. 12 U.S.C. 2604(c). The Bureau’s 

final rule is referred to as the 2013 

HOEPA Final Rule. 

• Loan Originator Compensation: 

Following its August 2012 proposal (the 

2012 Loan Originator Proposal),51 the 

Bureau is issuing a final rule to 

implement provisions of the DoddFrank Act requiring certain creditors 

and loan originators to meet certain 

duties of care, including qualification 

requirements; requiring the 

establishment of certain compliance 

procedures by depository institutions; 

prohibiting loan originators, creditors, 

and the affiliates of both from receiving 

compensation in various forms 

(including based on the terms of the 

transaction) and from sources other than 

the consumer, with specified 

exceptions; and establishing restrictions 

on mandatory arbitration and financing 

of single premium credit insurance, 

pursuant to TILA sections 129B and 

129C as established by Dodd-Frank Act 

sections 1402, 1403, and 1414(a). 15 

U.S.C. 1639b, 1639c. The Bureau’s final 

rule is referred to as the 2013 Loan 

Originator Final Rule. 

• Appraisals: The Bureau, jointly 

with other Federal agencies,52 is issuing 

a final rule implementing Dodd-Frank 

Act requirements concerning appraisals 

for higher-risk mortgages, pursuant to 

TILA section 129H as established by 

Dodd-Frank Act section 1471. 15 U.S.C. 

1639h. This rule follows the agencies’ 

August 2012 joint proposal (the 2012 

Interagency Appraisals Proposal).53 The 

agencies’ joint final rule is referred to as 

the 2013 Interagency Appraisals Final 

Rule. As discussed in that final rule, the 

agencies plan to issue a supplemental 

proposal addressing potential additional 

exemptions to the appraisal 

requirements. In addition, following its 

August 2012 proposal (the 2012 ECOA 

Appraisals Proposal),54 the Bureau is 

issuing a final rule to implement 

provisions of the Dodd-Frank Act 

requiring that creditors provide 

applicants with a free copy of written 

appraisals and valuations developed in 

connection with applications for loans 

secured by a first lien on a dwelling, 

pursuant to section 701(e) of the Equal 

Credit Opportunity Act (ECOA) as 

amended by Dodd-Frank Act section 

1474. 15 U.S.C. 1691(e). The Bureau’s 

final rule is referred to as the 2013 

ECOA Appraisals Final Rule. 

The Bureau is not at this time 

finalizing proposals concerning various 

disclosure requirements that were 

added by title XIV of the Dodd-Frank 

Act, integration of mortgage disclosures 

under TILA and RESPA, or a simpler, 

more inclusive definition of the finance 

charge for purposes of disclosures for 

closed-end mortgage transactions under 

Regulation Z. The Bureau expects to 

finalize these proposals and to consider 

whether to adjust regulatory thresholds 

under the Title XIV Rulemakings in 

connection with any change in the 

calculation of the finance charge later in 

2013, after it has completed quantitative 

testing, and any additional qualitative 

testing deemed appropriate, of the forms 

that it proposed in July 2012 to combine 

TILA mortgage disclosures with the 

good faith estimate (RESPA GFE) and 

settlement statement (RESPA settlement 

statement) required under the Real 

Estate Settlement Procedures Act, 

pursuant to Dodd-Frank Act section 

1032(f) and sections 4(a) of RESPA and 

105(b) of TILA, as amended by DoddFrank Act sections 1098 and 1100A, 

respectively (the 2012 TILA–RESPA 

Proposal).55 Accordingly, the Bureau 

already has issued a final rule delaying 

implementation of various affected title 

XIV disclosure provisions.56

Coordinated Implementation of Title 

XIV Rulemakings 

As noted in all of its foregoing 

proposals, the Bureau regards each of 

the Title XIV Rulemakings as affecting 

aspects of the mortgage industry and its 

regulations. Accordingly, as noted in its 

proposals, the Bureau is coordinating 

carefully the Title XIV Rulemakings, 

particularly with respect to their 

effective dates. The Dodd-Frank Act 

requirements to be implemented by the 

Title XIV Rulemakings generally will 

take effect on January 21, 2013, unless 

final rules implementing those 

requirements are issued on or before 

that date and provide for a different 

effective date. See Dodd-Frank Act 

section 1400(c), 15 U.S.C. 1601 note. In 

addition, some of the Title XIV 

Rulemakings are required by the DoddFrank Act to take effect no later than 

one year after they are issued. Id. 

The comments on the appropriate 

effective date for this final rule are 

discussed in detail below in part VI of 

this notice. In general, however, 

consumer advocates requested that the 

Bureau put the protections in the Title 

XIV Rulemakings into effect as soon as 

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10914 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

57Of the several final rules being adopted under 

the Title XIV Rulemakings, six entail amendments 

to Regulation Z, with the only exceptions being the 

2013 RESPA Servicing Final Rule (Regulation X) 

and the 2013 ECOA Appraisals Final Rule 

(Regulation B); the 2013 HOEPA Final Rule also 

amends Regulation X, in addition to Regulation Z. 

The six Regulation Z final rules involve numerous 

instances of intersecting provisions, either by crossreferences to each other’s provisions or by adopting 

parallel provisions. Thus, adopting some of those 

amendments without also adopting certain other, 

closely related provisions would create significant 

technical issues, e.g., new provisions containing 

cross-references to other provisions that do not yet 

exist, which could undermine the ability of 

creditors and other parties subject to the rules to 

understand their obligations and implement 

appropriate systems changes in an integrated and 

efficient manner. 

58 12 U.S.C. 5581(a)(1). 

59 Dodd-Frank Act section 1002(14), 12 U.S.C. 

5481(14) (defining ‘‘Federal consumer financial 

law’’ to include the ‘‘enumerated consumer laws’’ 

and the provisions of title X of the Dodd-Frank Act); 

Dodd-Frank Act section 1002(12), 12 U.S.C. 

5481(12) (defining ‘‘enumerated consumer laws’’ to 

include RESPA), Dodd-Frank section 1400(b), 15 

U.S.C. 1601 note (defining ‘‘enumerated consumer 

laws’’ to include certain subtitles and provisions of 

title XIV). 

practicable. In contrast, the Bureau 

received some industry comments 

indicating that implementing so many 

new requirements at the same time 

would create a significant cumulative 

burden for creditors. In addition, many 

commenters also acknowledged the 

advantages of implementing multiple 

revisions to the regulations in a 

coordinated fashion.57 Thus, a tension 

exists between coordinating the 

adoption of the Title XIV Rulemakings 

and facilitating industry’s 

implementation of such a large set of 

new requirements. Some have suggested 

that the Bureau resolve this tension by 

adopting a sequenced implementation, 

while others have requested that the 

Bureau simply provide a longer 

implementation period for all of the 

final rules. 

The Bureau recognizes that many of 

the new provisions will require 

creditors to make changes to automated 

systems and, further, that most 

administrators of large systems are 

reluctant to make too many changes to 

their systems at once. At the same time, 

however, the Bureau notes that the 

Dodd-Frank Act established virtually all 

of these changes to institutions’ 

compliance responsibilities, and 

contemplated that they be implemented 

in a relatively short period of time. And, 

as already noted, the extent of 

interaction among many of the Title XIV 

Rulemakings necessitates that many of 

their provisions take effect together. 

Finally, notwithstanding commenters’ 

expressed concerns for cumulative 

burden, the Bureau expects that 

creditors actually may realize some 

efficiencies from adapting their systems 

for compliance with multiple new, 

closely related requirements at once, 

especially if given sufficient overall 

time to do so. 

Accordingly, the Bureau is requiring 

that, as a general matter, creditors and 

other affected persons begin complying 

with the final rules on January 10, 2014. 

As noted above, section 1400(c) of the 

Dodd-Frank Act requires that some 

provisions of the Title XIV Rulemakings 

take effect no later than one year after 

the Bureau issues them. Accordingly, 

the Bureau is establishing January 10, 

2014, one year after issuance of the 

Bureau’s 2013 ATR, Escrows, and 

HOEPA Final Rules (i.e., the earliest of 

the Title XIV Rulemakings), as the 

baseline effective date for most of the 

Title XIV Rulemakings. The Bureau 

believes that, on balance, this approach 

will facilitate the implementation of the 

rules’ overlapping provisions, while 

also affording creditors sufficient time 

to implement the more complex or 

resource-intensive new requirements. 

The Bureau has identified certain 

rulemakings or selected aspects thereof, 

however, that do not present significant 

implementation burdens for industry. 

Accordingly, the Bureau is setting 

earlier effective dates for those final 

rules or certain aspects thereof, as 

applicable. Those effective dates are set 

forth and explained in the Federal 

Register notices for those final rules. 

IV. Legal Authority 

The final rule was issued on January 

17, 2013, in accordance with 12 CFR 

1074.1. The Bureau is issuing this final 

rule pursuant to its authority under 

TILA and the Dodd-Frank Act. Section 

1061 of the Dodd-Frank Act transferred 

to the Bureau the ‘‘consumer financial 

protection functions’’ previously vested 

in certain other Federal agencies, 

including the Board. The term 

‘‘consumer financial protection 

function’’ is defined to include ‘‘all 

authority to prescribe rules or issue 

orders or guidelines pursuant to any 

Federal consumer financial law, 

including performing appropriate 

functions to promulgate and review 

such rules, orders, and guidelines.’’ 58

TILA is a Federal consumer financial 

law.59 Accordingly, the Bureau has 

authority to issue regulations pursuant 

to TILA, including implementing the 

additions and amendments to TILA’s 

mortgage servicing requirements made 

by title XIV of the Dodd-Frank Act. 

Sections 1418, 1420 and 1464 of the 

Dodd-Frank Act create new 

requirements under TILA in new 

sections 128A, 128(f), and 129F and 

129G, respectively. Section 1418 of the 

Dodd-Frank Act amends Regulation Z to 

require that certain disclosures be 

provided to consumers with hybrid 

adjustable-rate mortgages secured by the 

consumer’s principal residence the first 

time the interest rate resets or adjusts. 

Additionally, the savings clause in TILA 

section 128A(c) allows the Bureau, 

among other things, to require this 

notice for adjustable-rate mortgage loans 

that are not hybrid adjustable-rate loans. 

Dodd-Frank Act section 1420 requires 

that a periodic statement be provided to 

consumers for each billing cycle of a 

consumer’s closed-end mortgage 

secured by a dwelling, except for fixedrate loans with coupon books containing 

substantially the same information. The 

statute contains a list of specific 

information that must be included in 

the periodic statement. Additionally, 

pursuant to TILA section 128(f)(1)(H), 

the periodic statement must include 

such other information as the Bureau 

may prescribe in regulations. DoddFrank Act section 1464 generally 

requires the prompt crediting of 

mortgage payments in connection with 

consumer credit transactions secured by 

a consumer’s principal dwelling and an 

accurate timely response to requests for 

payoff amounts for home loans. The 

final rule, in addition to implementing 

these TILA provisions of the DoddFrank Act, amends the interest rate 

adjustment disclosures currently 

required by § 1026.20(c). The final rule 

also relies on the rulemaking and 

exception authorities specifically 

granted to the Bureau by TILA and the 

Dodd-Frank Act, including the 

authorities discussed below. 

The Truth in Lending Act 

TILA section 105(a). As amended by 

the Dodd-Frank Act, TILA section 

105(a), 15 U.S.C. 1604(a), directs the 

Bureau to prescribe regulations to carry 

out the purposes of TILA, and provides 

that such regulations may contain 

additional requirements, classifications, 

differentiations, or other provisions, and 

may provide for such adjustments and 

exceptions for all or any class of 

transactions that the Bureau judges are 

necessary or proper to effectuate the 

purposes of TILA, to prevent 

circumvention or evasion thereof, or to 

facilitate compliance therewith. The 

purposes of TILA are ‘‘to assure a 

meaningful disclosure of credit terms so 

that the consumers will be able to 

compare more readily the various credit 

terms available and avoid the 

uninformed use of credit’’ and to protect 

consumers against inaccurate and unfair 

credit billing practices. TILA section 

102(a); 15 U.S.C. 1601(a). 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10915 

60 15 U.S.C. 1639. TILA section 129 contains 

requirements for certain high-cost mortgages, 

established by the Home Ownership and Equity 

Protection Act (HOEPA), which are commonly 

called HOEPA loans. 

Historically, TILA section 105(a) has 

served as a broad source of authority for 

rules that promote the informed use of 

credit and the avoidance of unfair credit 

billing practices through required 

disclosures and substantive regulation 

of certain practices. Dodd-Frank Act 

section 1100A additionally clarifies the 

Bureau’s TILA section 105(a) authority 

by amending that section to provide 

express authority to prescribe 

regulations that contain ‘‘additional 

requirements’’ that the Bureau finds are 

necessary or proper to effectuate the 

purposes of TILA, to prevent 

circumvention or evasion thereof, or to 

facilitate compliance therewith. This 

amendment clarified that the Bureau 

has the authority to exercise TILA 

section 105(a) to prescribe requirements 

beyond those specifically listed in the 

statute that meet the standards outlined 

in section 105(a). The Dodd-Frank Act 

also clarified the Bureau’s rulemaking 

authority over certain high-cost 

mortgages pursuant to section 105(a). As 

amended by the Dodd-Frank Act, TILA 

section 105(a) authority to make 

adjustments and exceptions to the 

requirements of TILA applies to all 

transactions subject to TILA, except 

with respect to the provisions of TILA 

section 129 60 that apply to the high-cost 

mortgages referred to in TILA section 

103(bb), 15 U.S.C. 1602(bb). 

For the reasons discussed in this 

notice, the Bureau is adopting 

regulations to carry out TILA’s purposes 

and such additional requirements, 

adjustments, and exceptions as, in the 

Bureau’s judgment, are necessary and 

proper to carry out the purposes of 

TILA, prevent circumvention or evasion 

thereof, or to facilitate compliance 

therewith. In developing these aspects 

of the rule pursuant to its authority 

under TILA section 105(a), the Bureau 

has considered the purposes of TILA, 

including ensuring meaningful 

disclosures, helping consumers avoid 

the uninformed use of credit, and 

protecting consumers against inaccurate 

and unfair credit billing practices. See 

TILA section 102(a); 15 U.S.C. 1601(a). 

TILA section 105(f). Section 105(f) of 

TILA, 15 U.S.C. 1604(f), authorizes the 

Bureau to exempt from all or part of 

TILA any class of transactions if the 

Bureau determines that TILA coverage 

does not provide a meaningful benefit to 

consumers in the form of useful 

information or protection. In exercising 

this authority, the Bureau must consider 

the factors identified in section 105(f) of 

TILA and publish its rationale at the 

time it proposes an exemption for 

public comment. Specifically, the 

Bureau must consider: (a) The amount 

of the loan and whether the disclosures, 

right of rescission, and other provisions 

provide a benefit to the consumers who 

are parties to such transactions, as 

determined by the Bureau; (b) The 

extent to which the requirements of this 

subchapter complicate, hinder, or make 

more expensive the credit process for 

the class of transactions; (c) The status 

of the consumer, including—(1) Any 

related financial arrangements of the 

consumer, as determined by the Bureau; 

(2) The financial sophistication of the 

consumer relative to the type of 

transaction; and (3) The importance to 

the consumer of the credit, related 

supporting property, and coverage 

under this subchapter, as determined by 

the Bureau; (d) Whether the loan is 

secured by the principal residence of 

the consumer; and (e) Whether the goal 

of consumer protection would be 

undermined by such an exemption. 

For the reasons discussed in this 

notice, the Bureau is exempting certain 

transactions from the requirements of 

TILA pursuant to its authority under 

TILA section 105(f). In developing this 

final rule under TILA section 105(f), the 

Bureau has considered the relevant 

factors and determined that the 

proposed exemptions may be 

appropriate. 

TILA section 122. Section 122 of 

TILA, 15 U.S.C. 1632, authorizes the 

Bureau to regulate, among other things, 

the form and content of disclosures for 

credit transactions made pursuant to 

Chapter 2 of TILA. Specifically, 122(a) 

requires that information required by 

this title must be disclosed clearly and 

conspicuously. 

For the reasons discussed in this 

notice, the Bureau is requiring the 

provision of disclosures to consumers in 

certain forms and with certain content 

pursuant to its authority under TILA 

section 122. In developing this final rule 

under TILA section 122, the Bureau has 

considered the relevant factors and 

determined that the form and content 

requirements are appropriate. 

Title X of the Dodd-Frank Act 

Dodd-Frank Act section 1022(b). 

Section 1022(b)(1) of the Dodd-Frank 

Act authorizes the Bureau to prescribe 

rules ‘‘as may be necessary or 

appropriate to enable the Bureau to 

administer and carry out the purposes 

and objectives of the Federal consumer 

financial laws, and to prevent evasions 

thereof[.]’’ 12 U.S.C. 5512(b)(1). TILA 

and title X of the Dodd-Frank Act are 

Federal consumer financial laws. 

Accordingly, in adopting this final rule, 

the Bureau is exercising its authority 

under Dodd-Frank Act section 1022(b) 

to prescribe rules to carry out the 

purposes of TILA and title X and 

prevent evasion of those laws. 

Dodd-Frank Act section 1032. Section 

1032(a) of the Dodd-Frank Act provides 

that the Bureau ‘‘may prescribe rules to 

ensure that the features of any consumer 

financial product or service, both 

initially and over the term of the 

product or service, are fully, accurately, 

and effectively disclosed to consumers 

in a manner that permits consumers to 

understand the costs, benefits, and risks 

associated with the product or service, 

in light of the facts and circumstances.’’ 

12 U.S.C. 5532(a). The authority granted 

to the Bureau in Dodd-Frank Act section 

1032(a) is broad, and empowers the 

Bureau to prescribe rules regarding the 

disclosure of the ‘‘features’’ of consumer 

financial products and services 

generally. Accordingly, the Bureau may 

prescribe rules containing disclosure 

requirements even if other Federal 

consumer financial laws do not 

specifically require disclosure of such 

features. 

Dodd-Frank Act section 1032(c) 

provides that, in prescribing rules 

pursuant to Dodd-Frank Act section 

1032, the Bureau ‘‘shall consider 

available evidence about consumer 

awareness, understanding of, and 

responses to disclosures or 

communications about the risks, costs, 

and benefits of consumer financial 

products or services.’’ 12 U.S.C. 5532(c). 

Accordingly, in developing the final 

rule under Dodd-Frank Act section 

1032(a), the Bureau has considered 

available studies, reports, and other 

evidence about consumer awareness, 

understanding of, and responses to 

disclosures or communications about 

the risks, costs, and benefits of 

consumer financial products or services. 

For the reasons discussed in this notice, 

the Bureau is issuing portions of this 

rule pursuant to its authority under 

Dodd-Frank Act section 1032(a). 

In addition, Dodd-Frank Act section 

1032(b)(1) provides that ‘‘any final rule 

prescribed by the Bureau under this 

[section 1032] requiring disclosures may 

include a model form that may be used 

at the option of the covered person for 

provision of the required disclosures.’’ 

12 U.S.C. 5532(b)(1). Any model form 

issued pursuant to that authority shall 

contain a clear and conspicuous 

disclosure that, at a minimum, uses 

plain language that is comprehensible to 

consumers, uses a clear format and 

design, such as readable type font, and 

succinctly explains the information that 

must be communicated to the consumer. 

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10916 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

Dodd-Frank Act section 1032(b)(2); 12 

U.S.C. 5532(b)(2). As discussed in the 

section-by-section analysis of 

§§ 1026.20(c) and (d) and 1026.41, the 

Bureau is issuing model and sample 

forms for ARM interest rate adjustment 

notices and sample forms for periodic 

statements. As discussed in this notice, 

the Bureau is adopting these model 

forms pursuant to its authority under 

Dodd-Frank Act section 1032(b)(1). As 

required under Dodd-Frank Act section 

1032(b)(3), the Bureau has validated 

model forms issued under Dodd-Frank 

Act section 1032(b) through consumer 

testing. 

Dodd-Frank Act section 1405(b). 

Section 1405(b) of the Dodd-Frank Act 

provides that, ‘‘[n]otwithstanding any 

other provision of [title 14 of the DoddFrank Act], in order to improve 

consumer awareness and understanding 

of transactions involving residential 

mortgage loans through the use of 

disclosures, the Bureau may, by rule, 

exempt from or modify disclosure 

requirements, in whole or in part, for 

any class of residential mortgage loans 

if the Bureau determines that such 

exemption or modification is in the 

interest of consumers and in the public 

interest.’’ 15 U.S.C. 1601 note. Section 

1401 of the Dodd-Frank Act, which 

amends TILA section 103(cc), 15 U.S.C. 

1602(cc), generally defines residential 

mortgage loan as any consumer credit 

transaction that is secured by a mortgage 

on a dwelling or on residential real 

property that includes a dwelling other 

than an open-end credit plan or an 

extension of credit secured by a 

consumer’s interest in a timeshare plan. 

Notably, section 1405(b) confers 

authority to ‘‘modify or exempt from 

disclosure requirements,’’ in whole or in 

part, applies to any class of residential 

mortgage loans if the Bureau determines 

that such exemption or modification is 

in the interest of consumers and in the 

public interest, and is not limited to a 

specific statute or statutes. Accordingly, 

Dodd-Frank Act section 1405(b) is a 

broad source of authority to modify or 

exempt the disclosure requirements of 

TILA. 

In developing rules for residential 

mortgage loans under Dodd-Frank Act 

section 1405(b), the Bureau has 

considered the purposes of improving 

consumer awareness and understanding 

of transactions involving residential 

mortgage loans through the use of 

disclosures, and the interests of 

consumers and the public. For the 

reasons discussed in this notice, the 

Bureau is issuing portions of this rule 

pursuant to its authority under DoddFrank Act section 1405(b). See the 

section-by-section analysis of each 

section of this final rule for further 

elaboration on legal authority. 

V. Section-by-Section Analysis 

A. Regulation Z 

Section 1026.17 General Disclosure 

Requirements 

17(a) Form of Disclosures 

17(a)(1) 

Section 1026.17(a)(1) contains form 

requirements that govern many of the 

disclosures under subpart C of 

Regulation Z, including current ARM 

disclosures. The Bureau proposed 

revising the rule with regard to both the 

§ 1026.20(c) ARM interest rate 

adjustment payment change notices and 

the § 1026.20(d) initial ARM interest 

rate adjustment notices. 

Section 1026.17(a)(1) requires, among 

other things, that certain disclosures 

contain only information directly 

related to that disclosure. Section 

1026.20(c) is not included in the list of 

rules governed by this general 

segregation requirement and 

commentary to § 1026.17(a)(1) confirms 

that § 1026.20(c) is not subject to this 

requirement. 

The Bureau proposed revising 

§ 1026.17(a)(1) and comment 17(a)(1)– 

2.ii to add § 1026.20(c) to the list of 

disclosures required to contain only 

information directly related to the 

disclosure and to include § 1026.20(c) 

among the subpart C disclosures 

required to be grouped together and 

segregated from other information. The 

Bureau stated that the purpose of the 

§ 1026.20(c) payment change notices is 

to inform consumers of upcoming 

changes to their interest rate and 

mortgage payments and to give them 

time to explore alternatives. The Bureau 

stated that it believed that the current 

form requirements to which the 

§ 1026.20(c) notices are subject were 

insufficient to highlight and emphasize 

important information consumers 

needed to make decisions about their 

adjustable-rate mortgages. The Bureau 

said that the revisions to § 1026.17(a)(1) 

and comment 17(a)(1)–2.ii would 

enhance consumers’ awareness of this 

important information. The proposal 

also clarified that providers of 

§ 1026.20(c) notices would have 

remained subject to the other 

§ 1026.17(a)(1) form requirements, 

including that the disclosures be clear 

and conspicuous and in writing and that 

the disclosures could be provided 

electronically subject to compliance 

with Electronic Signatures in Global and 

National Commerce Act (E-Sign Act) (15 

U.S.C. 7001 et seq.). 

Although the Bureau received 

comments opposed to the revision of 

§ 1026.20(c) in general, which are 

discussed below, the Bureau did not 

receive specific comments regarding its 

proposed changes to § 1026.17(a)(1). 

One bank did suggest that E-Sign Act 

not apply to the ARM disclosures such 

that they could be provided to 

consumers without their demonstrated 

consent, which the bank said was 

difficult to obtain. The Bureau notes 

that E-Sign Act requirements apply to 

current § 1026.20(c) as well as to the 

other disclosures required under 

subpart C. Further, TILA section 128A 

specifically requires the ARM initial 

interest rate notices to be provided to 

consumers in written form. The Bureau 

believes these requirements can ensure 

that consumers receive the required 

disclosures and therefore declines to 

scale back this consumer protection. For 

the reasons discussed above, the Bureau 

is adopting as proposed revised 

§ 1026.17(a)(1) and comment 17(a)(1)– 

2.ii. Thus, the disclosures required by 

§ 1026.20(c) must comply with the form 

requirements of § 1026.17(a)(1) as 

revised. 

As with § 1026.20(c) above, the 

proposal clarified that providers of the 

§ 1026.20(d) notices would have been 

subject to the same § 1026.17(a)(1) form 

requirements, including that the 

disclosures be clear and conspicuous, in 

writing, and that they be permitted to be 

provided electronically subject to 

compliance with the E-Sign Act. 

However, the final rule revises 

§ 1026.17(a)(1) with respect to the 

delivery of the notices required by 

§ 1026.20(d). TILA section 128A, as 

added by Dodd-Frank Act section 1418 

and implemented in § 1026.20(d), 

requires that initial ARM interest rate 

adjustment notices be ‘‘separate and 

distinct from all other correspondence 

to the consumer.’’ Accordingly, the 

Bureau proposed that the § 1026.20(d) 

ARM initial interest rate adjustment 

notices must be provided to consumers 

separate and distinct from all other 

correspondence and, thus, that they 

would not be subject to the general 

segregation requirements of 

§ 1026.17(a)(1). Proposed comment 

20(d)(1)–2 interpreted the ‘‘separate and 

distinct’’ requirement as requiring the 

§ 1026.20(d) notices to be provided to 

consumers in a separate envelope or as 

its own separate email apart from other 

servicer correspondence. 

For the reasons discussed in the 

section-by-section analysis of 

§ 1026.20(d) below, the Bureau is 

adopting comment 20(d)–3, which 

interprets the new TILA statutory 

language to require that § 1026.20(d) 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10917 

notices be provided to consumers as a 

separate document, but permits it to be 

mailed in the same envelope or as a 

separate attachment in an email with 

other servicer correspondence. 

Accordingly, the final rule revises 

§ 1026.17(a)(1) to require that 

§ 1026.20(d) ARM notices be provided 

to consumers as a separate document, 

but not necessarily in a separate 

envelope or email. As a result of this 

change, both § 1026.20(c) and (d) are 

subject to revised § 1026.17(a)(1) and 

comment 17(a)(1)–2.i. 

Legal Authority 

The application of § 1026.17(a)(1), as 

modified, to § 1026.20(c) and (d) is 

authorized, in part, under TILA section 

122, which requires that disclosures 

under TILA be clear and conspicuous, 

in accordance with regulations of the 

Bureau. The requirements are further 

authorized under TILA section 105(a) 

because the Bureau believes that the 

final rule’s form requirements are 

necessary and proper to effectuate the 

purposes of TILA to assure a meaningful 

disclosure of credit terms, avoid the 

uninformed use of credit, and protect 

consumers against inaccurate and unfair 

credit billing practices by ensuring that 

consumers understand the content of 

the ARM notices. 

TILA section 128A(b), as established 

by Dodd-Frank Act section 1418, 

specifically provides that the 

disclosures shall be in writing, separate 

and distinct from all other 

correspondence, which the Bureau 

interprets as consistent with the 

Regulation Z form requirements of 

§ 1026.17(a)(1), as amended. In addition, 

the Bureau believes, consistent with 

Dodd-Frank Act section 1032(a), that the 

application of § 1026.17(a)(1) to 

§ 1026.20(d) will ensure that the 

features of ARM loans are effectively 

disclosed to consumers in a manner that 

allows consumers to understand the 

information disclosed. 

17(b) Time of Disclosures 

Section 1026.17(b) generally 

establishes timing requirements for 

certain Regulation Z disclosures, among 

them rules with special timing 

requirements. The Bureau proposed 

revising § 1026.17(b) to add § 1026.20(d) 

to the list of variable-rate disclosure 

provisions with special timing 

requirements. This amendment would 

have alerted creditors, assignees, and 

servicers that, as with the § 1026.20(c) 

payment adjustment notices, there are 

timing requirements particular to the 

§ 1026.20(d) initial interest rate 

adjustment notices. The Bureau 

received no comments regarding this 

revision and is adopting revised 

1026.17(b). 

17(c) Basis of Disclosures and Use of 

Estimates 

17(c)(1) 

Section 1026.17(c)(1) requires 

disclosures to reflect the terms of the 

legal obligation between the parties. 

Current comment 17(c)(1)–1 provides 

that, under this requirement, disclosures 

generally must reflect the credit terms to 

which the parties are legally bound as 

of the outset of the transaction but that, 

in the case of disclosures required by 

§ 1026.20(c), the disclosures shall reflect 

the credit terms to which the parties are 

legally bound when the disclosures are 

provided. The Bureau proposed revising 

comment 17(c)(1)–1 to make clear that 

the disclosures required by § 1026.20(d), 

like those required by § 1026.20(c), must 

reflect the credit terms to which the 

parties are legally bound when the 

disclosures are provided, rather than at 

the outset of the transaction. The Bureau 

received no comments regarding this 

revision and is adopting revised 

comment 17(c)(1)–1. 

Section 1026.18 Content of Disclosures 

18(f) Variable Rate 

Section 1026.18(f) sets forth the 

contents of disclosures required for 

certain variable-rate transactions. 

Comment 18(f)–1 clarifies that creditors 

electing to substitute § 1026.19(b) 

disclosures for § 1026.18(f)(1) 

disclosures, as permitted by 

§ 1026.18(f)(1) and (3), may, but need 

not, also provide disclosures required 

by § 1026.20(c). Under current 

§ 1026.20(c), disclosures are permissive 

in such cases because the § 1026.19(b) 

substitution is permitted only for 

variable-rate transactions not secured by 

the consumer’s principal dwelling or 

variable-rate transactions secured by the 

consumer’s principal dwelling, with a 

term of one year or less. These types of 

transactions are not covered by current 

§ 1026.20(c). Thus, comment 18(f)–1 

does not alter the legal requirements 

applicable to creditors. The clarification 

was included in the comment, however, 

because § 1026.20(c) cross-references 

§ 1026.19(b) and applies to transactions 

covered by § 1026.19(b). 

The Bureau proposed removing this 

reference to § 1026.20(c) from comment 

18(f)–1 because it would no longer have 

been helpful because proposed 

§ 1026.20(c) and (d) did not crossreference § 1026.19(b) and defined their 

scope of coverage without reference to 

§ 1026.19(b). Moreover, § 1026.20(c) and 

(d) would have applied to some ARMs 

with terms of one year or less, such that 

applying the current comment would 

have created an unwarranted exemption 

from the requirement to provide ARM 

notices to consumers with such ARMs. 

For these reasons, the Bureau proposed 

to remove the reference to § 1026.20(c) 

in comment 18(f)–1. 

The Bureau received no comments on 

this issue. However, as discussed below 

in the section-by-section analysis of 

§ 1026.20(c)(1)(ii) and (d)(1)(ii), the final 

rule expands the construction loan 

exemption to all ARMs with terms of 

one year or less, thereby eliminating any 

need to revise comment 18(f)(1)–1. 

Thus, the Bureau is not adopting the 

proposed revision of comment 18(f)(1)– 

1. 

Section 1026.19 Certain Mortgage and 

Variable-Rate Transactions 

19(b) Certain Variable-Rate Transactions 

Section 1026.19(b) requires 

disclosures for consumers applying for 

certain variable-rate transactions. 

Comment 19(b)–4 explains that 

transactions in which the creditor is 

required to comply with and has 

complied with the disclosure 

requirements of the variable-rate 

regulations of other Federal agencies are 

exempt from the requirements of 

§ 1026.20(c) by virtue of § 1026.20(d). 

Consistent with the proposed removal of 

current § 1026.20(d), discussed below, 

which exempts creditors, assignees, and 

servicers from the requirements of 

§ 1026.20(c) if they have complied with 

disclosure requirements of other Federal 

agencies, the Bureau proposed revising 

comment 19(b)–4 to remove the 

reference to § 1026.20(c) and (d). The 

Bureau is issuing this aspect of the final 

rule as proposed, having received no 

comment on this issue. 

The Bureau proposed revising 

comment 19(b)-5.i.C to cross-reference 

other commentary that makes clear that 

§ 1026.20(c) and (d) would not apply to 

‘‘price-level-adjusted mortgages’’ that 

have a fixed-rate of interest but provide 

for periodic adjustments to payments 

and the loan balance to reflect changes 

in an index measuring prices or 

inflation. Having received no comments 

on the above proposed change, the 

Bureau is issuing this aspect of the final 

rule as proposed. 

The Bureau proposed revising 

comment 19(b)(2)(xi)–1 to include a 

reference to § 1026.20(d). Pursuant to 

current § 1026.19(b)(2)(xi), disclosures 

regarding the type of information that 

will be provided in notices of interest 

rate adjustments and the timing of such 

notices must be provided to consumers 

applying for variable-rate transactions 

secured by the consumer’s principal 

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dwelling with a term greater than one 

year. Current comment 19(b)(2)(xi)–1 

clarifies that these disclosures include 

information regarding the content and 

timing of disclosures consumers will 

receive pursuant to current § 1026.20(c). 

The Bureau proposed adding to the 

comment a reference to § 1026.20(d), 

because those disclosures also would 

have been provided to consumers under 

the Bureau’s proposed rule. The 

proposed comment also made 

conforming changes to the text 

suggested for describing the ARM 

notices to reflect the timing and content 

of the § 1026.20(c) and (d) disclosures. 

Having received no comments on this 

change, the Bureau is adopting 

comment 19(b)(2)(xi)–1 as proposed. 

Section 1026.20 Disclosure 

Requirements Regarding PostConsummation Events 

20(c) Rate Adjustments with a 

Corresponding Change in Payment 

Overview 

Section 1026.20(c) requires that 

disclosures be provided to consumers 

with variable-rate mortgages each time 

an adjustment results in a 

corresponding payment change and at 

least once each year during which an 

interest rate adjustment is implemented 

without a corresponding payment 

change. The current rule does not 

differentiate between the content 

required for the non-payment change 

annual notice and the notices required 

each time the interest rate adjustment 

results in a corresponding payment 

change. Section 1026.20(c) also requires 

that adjustment notices disclose the 

following: (1) The current and prior 

interest rates for the loan; (2) the index 

values upon which the current and prior 

interest rates are based; (3) the extent to 

which the creditor has foregone any 

increase in the interest rate; (4) the 

contractual effects of the adjustment, 

including the payment due after the 

adjustment is made, and a statement of 

the loan balance; and (5) the payment, 

if different from the payment due after 

adjustment, that would be required to 

amortize fully the loan at the new 

interest rate over the remainder of the 

loan term. 

The Bureau proposed two major 

changes to § 1026.20(c). First, the 

Bureau proposed eliminating the nonpayment change annual notice sent each 

year during which an interest rate 

adjustment is implemented without a 

corresponding payment change. As 

explained in more detail below, the 

Bureau stated that it believed that the 

Dodd-Frank Act amendments to TILA, 

and the Bureau’s proposed amendments 

to Regulation Z that would implement 

those provisions, would provide 

consumers with much of the 

information contained in this annual 

notice, thereby greatly minimizing the 

need for its protections. Second, the 

Bureau’s proposal would have amended 

current § 1026.20(c) by adding 

disclosures that the Bureau stated it 

believed would enhance protections for 

consumers with ARMs. The revisions to 

§ 1026.20(c) also would have 

harmonized that section with the 

requirements the Bureau proposed for 

the initial ARM interest rate adjustment 

notice under § 1026.20(d), thereby 

promoting consistency between the 

Regulation Z ARM provisions. 

The Bureau also would have revised 

the heading to § 1026.20 from 

‘‘Subsequent Disclosure Requirements’’ 

to ‘‘Disclosure Requirements Regarding 

Post-Consummation Events.’’ The 

Bureau proposed revising the heading 

for clarification because interest rate 

adjustments occur post-consummation, 

but, under certain circumstances, the 

ARM notices required under 

§ 1026.20(d) may be provided at 

consummation and thus are not 

‘‘subsequent disclosures’’. See the 

section-by-section analysis of 

§ 1026.20(d) below. The Bureau also 

proposed revising the heading to 

§ 1026.20(c) from ‘‘Variable-Rate 

Adjustments’’ to ‘‘Rate Adjustments 

with a Corresponding Change in 

Payment’’ to clarify that, pursuant to the 

proposed revision of § 1026.20(c), the 

disclosure would have been required 

only when the interest rate adjustment 

caused a change in the mortgage 

payment. 

Elimination of annual disclosure. The 

Bureau proposed to eliminate the 

§ 1026.20(c) annual notice required 

when an ARM’s interest rate adjusts one 

or more times over the course of a year 

without any corresponding payment 

change. The Bureau noted that 

consumers who receive the current nonpayment change annual notice, such as 

consumers with ARMs with payment 

caps, would receive much of the same 

information in the periodic statement 

under proposed § 1026.41, discussed 

below. The periodic statement would 

have provided consumers with 

comprehensive information about their 

mortgages each billing cycle. The 

periodic statement would have included 

some of the same key information 

provided to consumers under the 

current § 1026.20(c) annual notice, such 

as the current interest rate and the date 

after which that rate would adjust. It 

also would have provided other 

information that might be useful to 

consumers receiving the § 1026.20(c) 

annual notice, including information 

about any prepayment penalty; 

allocation of the consumer’s payment by 

principal, interest, and escrow; the 

amount of the outstanding principal; 

contact information for the relevant 

State housing finance authority; and 

information to access a list of Federallycertified homeownership counselors. 

In light of the amount, type, and 

frequency of the information the Bureau 

proposed to provide in the periodic 

statement to consumers with ARMs 

subject to current § 1026.20(c), the 

Bureau proposed to eliminate the nonpayment change annual notice as 

duplicative and potentially contributing 

to information overload that could 

deflect consumer attention away from 

the information received in other 

required disclosures. The Bureau 

solicited comments on the need, value, 

or use of retaining this annual notice 

required by § 1026.20(c) for consumers 

whose ARM interest rates adjust during 

the course of a year without resulting in 

corresponding payment changes. 

The Bureau also proposed to remove 

current comments 20(c)(1)–1 and 

20(c)(4)–1 which, among other things, 

address the content of the § 1026.20(c) 

non-payment change annual notice the 

Bureau proposed to eliminate. Comment 

20(c)(1)–1 also explains, among other 

things, the meaning of the terms 

‘‘current’’ and ‘‘prior’’ rates and that, in 

disclosing all other rates that applied 

during the period between notices, the 

creditor may disclose a range of the 

highest and lowest rates during that 

period. Comment 20(c)(4)–1, among 

other things, defines the term loan 

‘‘balance’’ and explains that a 

‘‘contractual effect’’ of a rate adjustment 

includes disclosure of any change in the 

term of the loan if the change resulted 

from the rate adjustment. The Bureau 

proposed removing these comments 

even though they also relate to the 

recurring disclosures that would have 

been required by proposed § 1026.20(c) 

for interest rate adjustments resulting in 

a corresponding payment change. The 

Bureau proposed replacing these 

comments with new commentary 

discussed below. 

Many industry commenters, including 

a large bank and a national trade 

association, supported eliminating the 

§ 1026.20(c) annual notice, which they 

characterized as costly and time 

consuming. One non-bank servicer, 

conversely, stated that the elimination 

of the annual notice did not provide any 

benefit for industry. A State 

enforcement agency and some consumer 

advocates supported discontinuation of 

the notice. Two comment letters from 

consumer groups recommended 

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61The Bureau worked with Macro to design and 

test model and sample forms (the model forms) for 

§ 1026.20(d), but did not specifically test 

§ 1026.20(c) model forms. Because of the similarity 

in the model forms for both rules, however, the 

results of the testing of § 1026.20(d) forms is 

relevant for § 1026.20(c) as well. Thus, throughout 

the section-by-section analysis below of 

§ 1026.20(c), the Bureau refers to the testing results 

for § 1026.20(d), as appropriate. 

retaining the annual notice but this was 

based on their understanding that the 

annual notice is required whether or not 

any interest rate adjustment over the 

course of the year caused a 

corresponding adjustment to the 

payment. The Bureau clarifies that the 

current rule requires an annual notice 

only when, over the course of a year, 

one or more interest rate adjustments 

have occurred without any payment 

change. These consumer groups pointed 

to payment-option ARMs, which one 

consumer group recommended be made 

illegal because they are inherently 

unfair, as a reason for retaining the 

annual notice. They said such loans can 

have multiple interest rate adjustments 

without a payment change and payment 

changes occur only when the loan 

resets, which can be infrequent (resets 

generally occur when the principal 

balance reaches some maximum, such 

as 125 percent of the original loan 

amount). 

For the reasons set forth in the 

proposal, the Bureau is adopting 

§ 1026.20(c) as proposed, with respect to 

the elimination of the non-payment 

change annual notice. With regard to 

concerns for consumers with paymentoption ARMs, the Bureau believes that 

the comprehensive information that will 

be disclosed to consumers every billing 

cycle in the periodic statement the 

Bureau is adopting under § 1026.41— 

most notably the consumer’s current 

interest rate and the date after which the 

interest rate will adjust and payment 

allocation information—provides 

information to such consumers that is 

superior to the information currently 

provided by the non-payment change 

annual notice under § 1026.20(c). The 

Bureau believes that the costs of 

requiring industry to provide both 

notices would outweigh the benefits 

consumers would garner from receiving 

this annual notice in addition to the 

periodic statement. The Bureau also 

notes that comment 20(c)(3)–1 

recognizes that creditors, assignees, and 

servicers may provide consumers with 

the non-payment change annual notice 

voluntarily, in their own discretion. 

Amendment of payment change 

disclosure. The Bureau proposed 

amending existing § 1026.20(c) as it 

relates to interest rate adjustments that 

result in a corresponding payment 

change. The proposed rule retained 

much of the content required in the 

current notice and added information 

that the Bureau stated it believed would 

help consumers better understand and 

manage their adjustable-rate mortgages. 

The revisions to current § 1026.20(c) 

would have harmonized that section 

with the requirements for the initial 

ARM interest rate adjustment notices 

the Bureau proposed in § 1026.20(d).61

In addition, the revisions would have 

required the interest rate adjustment 

notice be provided earlier than is 

currently required. The Bureau noted 

that promoting consistency between the 

ARM disclosures required by 

§ 1026.20(c) and (d) would reduce 

compliance burdens on industry and 

minimize consumer confusion. 

A large servicer and several trade 

associations opposed the revision of 

§ 1026.20(c), except for, as stated above, 

the Bureau’s proposal to eliminate the 

non-payment change annual notice. 

These industry commenters questioned 

the Bureau’s basis for revising a 

regulation they believed was not in need 

of improvement. Moreover, they noted 

that TILA section 128A, as established 

by Dodd-Frank Act section 1418, 

required the new § 1026.20(d) 

disclosure but did not mandate a 

revision of the existing ARM rule. In 

response to the proposal’s reference to 

the Board’s sweeping 2009 Closed-End 

Proposal, which proposed similar 

revisions to § 1026.20(c), these 

commenters pointed out that the Board 

never adopted a final rule. These 

commenters stated that the industry cost 

to revise the current disclosures, 

including compelling portfolio lenders 

to revise their proprietary product 

offerings, would outweigh the consumer 

benefits. They stated that the FHA, VA, 

and GSEs could not comply with the 

new timing requirements. One 

commenter stated that the current rule 

is superior to the one proposed by the 

Bureau. A few commenters stated that 

the ARM products that had contributed 

to the mortgage crisis have been largely 

removed from the market though 

refinancing or loan modification, 

thereby neutralizing any need to revise 

the current rule to provide heightened 

consumer protections. A research 

organization, a large bank, a trade 

association, and a credit union said that 

post-implementation testing was 

warranted to determine whether the 

Bureau’s contention that consumers 

would be better informed as a result of 

receiving the revised § 1026.20(c) 

disclosures is correct. Further, three 

small banks stated that the Bureau’s 

efforts to harmonize the two disclosures 

would not alleviate industry burden 

because the disclosures differed enough 

to require customized programming for 

each. Three comment letters from 

consumer groups, on the other hand, 

recommended expanding the content of 

the proposed § 1026.20(c) notice to 

include additional disclosures from the 

§ 1026.20(d) notice, particularly the loss 

mitigation information. 

The Bureau is adopting § 1026.20(c), 

with modifications to the revisions 

proposed by the Bureau. For the reasons 

stated above and throughout this final 

rule, the Bureau believes revision of the 

current rule furthers the purposes of 

TILA. Specifically, the Bureau believes 

the revision is appropriate and 

beneficial because consumers will better 

understand the costs and terms of 

adjustable-rate mortgages if they receive 

the ARM disclosures required by 

§ 1026.20(c) and (d) in notices with 

consistent formatting and clear 

information. Further, consumers will be 

better able to make an informed use of 

credit if they receive this information 

with enough time to budget for any 

increase or to take appropriate action, 

such as pursuing refinancing or options 

offered by servicers relating to 

individual hardship. The Bureau 

believes that the additional time and 

clearer information provide benefits to 

consumers anticipating payment 

changes that outweigh the costs to 

servicers to implement these changes. 

Moreover, as discussed in the sectionby-section analyses below, the Bureau 

believes that the § 1026.20(c) notice, 

which consumers may receive 

periodically, strikes an appropriate 

balance between disclosure of key 

information and overloading consumers 

with additional information that may or 

may not be applicable to their 

situations, such as loss mitigation 

options. For these reasons, the reasons 

set forth in the proposed rule, and the 

reasons discussed below in the analysis 

of each section of the rule, the Bureau 

is issuing its revision of § 1026.20(c). 

Creditors, assignees, and servicers. 

The Bureau also proposed amending 

§ 1026.20(c) to apply explicitly to 

creditors, assignees, and servicers. The 

Bureau stated that current § 1026.20(c) 

applied to creditors and existing 

comment 20(c)–1 clarified that the 

requirements of § 1026.20(c) also apply 

to subsequent holders, i.e., assignees. 

Under the Bureau’s proposal, the 

requirements of § 1026.20(c) would have 

applied to servicers, as well as to 

creditors and assignees. Proposed 

comment 20(c)–1 clarified, among other 

things, that a creditor, assignee, or 

servicer that no longer owned the 

mortgage loan or the mortgage servicing 

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rights would not have been subject to 

the requirements of § 1026.20(c). 

In its proposal, the Bureau stated that 

it was appropriate to apply proposed 

§ 1026.20(c) to servicers, as well as to 

creditors and assignees. The Bureau 

pointed out that many creditors and 

assignees do not service the loans they 

own and instead sell the mortgage 

servicing rights to a third party. The 

servicer is the party with which 

consumers have contact on an ongoing 

basis regarding their mortgages. 

Consumers send their payments to the 

servicer and communicate with the 

servicer regarding any questions or 

problems with their mortgages that may 

arise. Where the owner and the servicer 

are different entities, consumers may 

not know the identity of the owner and 

may not even realize that the servicer is 

not the owner of their mortgages. 

Moreover, it can be difficult for 

consumers to ascertain the identity of 

the creditor or assignee, even though 

servicers would have been required to 

identify the owner of a mortgage under 

the 2012 RESPA Servicing Proposal, 

pursuant to Dodd-Frank Act section 

1463. The Bureau stated a similar 

rationale for its proposal that the 

requirements of § 1026.20(d) apply to 

assignees as well as to creditors and 

servicers. 

For the reasons discussed above, 

proposed § 1026.20(c) would have 

required, as clarified by comment 20(c)– 

1, that any provision of subpart C 

governing § 1026.20(c) also would have 

applied to creditors, assignees, and 

servicers—even where the other 

provisions of subpart C referred only to 

creditors. The proposal also would have 

removed current comment 20(c)–1, 

which, among other things, referred to 

‘‘subsequent holders,’’ in favor of 

consistent usage of the term ‘‘assignee’’ 

in proposed § 1026.20(c) and (d). It also 

would have removed comment 20(c)–3 

as duplicative of the § 1026.17(c)(1) 

requirement that the disclosures reflect 

the terms of the parties’ legal 

obligations. 

A trade association and a non-bank 

servicer commented on this portion of 

the proposed rule. They stated that civil 

liability for violations of TILA is 

determined by TILA sections 130 and 

131 and that civil liability cannot be 

extended to servicers beyond the scope 

authorized under TILA. A State 

enforcement agency, in the other hand, 

commented that consumers should be 

able to seek relief against servicers for 

violations of § 1026.20(c). 

The Bureau is adopting the rule as 

proposed. The Bureau is adopting 

comment 20(c)–1, with added language 

clarifying that, (1) creditors, assignees, 

and servicers that own either the 

applicable ARM or the applicable 

mortgage servicing rights, or both, are 

subject to the requirements of 

§ 1026.20(d) and (2) although the rule 

applies to creditors, assignees, and 

servicers, those parties may decide 

among themselves which of them will 

provide the required disclosures. 

The Bureau notes that current 

§ 1026.20(c) does not mention creditors, 

assignees, or servicers. Thus, although 

the commentary explicitly references 

creditors and subsequent holders, 

neither the existing rule nor its 

commentary expressly exclude servicers 

from its requirements. The Bureau 

believes it is logical and appropriate to 

apply the requirements of § 1026.20(c) 

to servicers, as well as creditors and 

assignees of a mortgage loan. It is widely 

recognized that, since the 

implementation of § 1026.20(c) 

approximately 25 years ago, servicers 

have been providing the required 

disclosures to consumers with ARMs, as 

opposed to the creditors or assignees of 

those loans that are not otherwise 

considered servicers. As noted above, 

the servicer is the party with which 

consumers have contact on an ongoing 

basis regarding their mortgages. 

Servicers receive consumers’ payments. 

Consumers communicate with their 

servicers regarding questions or 

problems that may arise. Where the 

owner and the servicer are different 

entities, consumers may not know the 

identity of the owner and may not even 

realize that the servicer is not the owner 

of their mortgage. Thus, it is appropriate 

that servicers be included among the 

entities required to provide consumers 

with the disclosures under § 1026.20(c). 

The Bureau further notes that the rule 

would have required creditors, 

assignees, and servicers to provide 

consumers with the disclosures required 

by § 1026.20(c) without referencing 

creditor, assignee, or servicer civil 

liability. Consistent with the proposal, 

the final rule and commentary set forth 

the obligations of creditors, assignees, 

and servicers but do not specifically 

address the issue of civil liability of any 

covered person in an action brought by 

a consumer. That issue is governed by 

TILA sections 130 and 131, and the 

Bureau’s revisions do not purport to 

impose requirements inconsistent with 

TILA. For these reasons, and the reasons 

articulated in the proposal, the Bureau 

is adopting the final rule as proposed 

and comment 20(c)–1 as modified with 

regard to the application of § 1026.20(c) 

to creditors, assignees, and servicers. 

As discussed in the legal authority 

section below, including servicers as 

covered persons under the requirements 

of § 1026.20(c) is authorized under, 

among other authorities, TILA section 

105(a). Section 1026.20(c) is a servicing 

requirement and, as such, the Bureau 

believes that subjecting servicers to its 

requirements is necessary and proper to 

effectuate the purposes of TILA to 

assure a meaningful disclosure of credit 

terms, avoid the uninformed use of 

credit, and protect consumers against 

inaccurate and unfair credit billing 

practices. Also, TILA section 128(f), 

which applies to creditors, assignees, 

and servicers, provides authorization to 

include servicers within the scope of 

this rule. Finally, the Bureau notes that 

this revision of § 1026.20(c) is consistent 

with the scope of § 1026.20(d), such that 

both § 1026.20(c) and (d) now apply to 

creditors, assignees and servicers. 

Loan modifications. A large bank and 

a national trade association 

recommended that the Bureau exempt 

loan modifications for financiallydistressed consumers from the 

requirements of § 1026.20(c). They said 

that, among other reasons, requiring the 

notices in the context of a loan 

modification would delay execution of 

the loan modification by the 60 to 120 

days advance notice required under the 

rule and that the § 1026.20(c) notice was 

not appropriate for loan modifications. 

The Bureau notes that current 

§ 1026.20(c) does not exempt loan 

modifications from its requirements. 

However, the Bureau agrees with this 

recommendation, and therefore, 

§ 1026.20(c) limits coverage to interest 

rate adjustments pursuant to the ARM 

contract. Because interest rate 

adjustments occurring pursuant to a 

loan modification do not occur pursuant 

to the loan contract, they will not be 

subject to this rule and thus, will not 

delay execution of loan modification 

agreements. See comment 20(c)–2, 

which the Bureau is adopting in the 

final rule. The Bureau believes that an 

interest rate adjustment causing a 

payment change pursuant to a loan 

modification in a loss mitigation context 

does not require the consumer 

protections contemplated by 

§ 1026.20(c). Such consumers have 

either agreed to the new interest rate 

prior to execution of the loan 

modification or are receiving the benefit 

of a lower rate and thus, are not at risk 

of payment shock. Because the loan 

modification is the actual result of 

pursuing alternatives to the payments 

otherwise required under their 

adjustable-rate mortgages, the advance 

notice afforded by the rule does not 

benefit such consumers. 

For these reasons, as adopted, 

§ 1026.20(c) exempts from its coverage 

interest rate changes occurring in the 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10921 

context of a loan modification executed 

as a loss mitigation measure. Comment 

20(c)–2 clarifies, however, that the 

requirements of § 1026.20(c) do apply to 

interest rate changes that occur 

subsequent to the execution of a loan 

modification agreement, if the interest 

rate changes occur pursuant to the terms 

of the ARM contract as modified. 

Conversions. In its proposal, the 

Bureau also stated that § 1026.20(c) 

would apply to ARMs converting to 

fixed-rate mortgages when the 

adjustment to the interest rate resulted 

in a corresponding payment change. 

Providing this notice would have 

alerted consumers to their new interest 

rate and payment following conversion 

from an ARM to a fixed-rate mortgage. 

Proposed comment 20(c)–2 explained 

that, in the case of an open-end account 

converting to a closed-end adjustablerate mortgage, § 1026.20(c) disclosures 

would not be required until the 

implementation of the first interest rate 

adjustment that resulted in a 

corresponding payment change postconversion. The Bureau analogized the 

conversion to consummation. Thus, like 

other ARMs subject to the requirements 

of proposed § 1026.20(c), disclosures for 

these types of converted ARMs would 

not have been required until the first 

interest rate adjustment following the 

conversion which resulted in a 

corresponding payment change. The 

proposed rule would have been 

consistent with existing comment 20(c)– 

1 and proposed § 1026.20(d) regarding 

conversions. 

A large bank and a national trade 

association requested that the Bureau 

clarify that the requirement of 

§ 1026.20(c) to provide disclosures in 

the case of an ARM converting to a 

fixed-rate transaction does not apply to 

loan modifications made as part of loss 

mitigation efforts. Applying this 

measure to loan modifications, they 

stated, would harm the consumer by, 

among other things, needlessly delaying 

execution of the loan modification to 

comply with the rule. This 

recommendation is moot in view of the 

Bureau’s decision to limit the scope of 

coverage of § 1026.20(c) to ARMs 

adjusting pursuant to the loan contract, 

thereby exempting all loan 

modifications executed as a loss 

mitigation measure from the 

requirements of § 1026.20(c). 

A credit union stated that providing 

this disclosure would be redundant and 

confusing to consumers. The Bureau 

believes that consumers whose interest 

rates will change as a result of such 

conversions would benefit from 

receiving the § 1026.20(c) notice alerting 

them to the upcoming change, 

especially if the conversion occurs 

automatically under the loan contract. 

The Bureau is adopting proposed 

§ 1026.20(c) without modification. The 

Bureau also is adopting comment 20(c)– 

3, originally proposed as 20(c)–2, which 

interprets § 1026.20(c) with regard to 

conversions. The final rule removes 

current comment 20(c)–1. 

Legal Authority 

The Bureau amends § 1026.20(c) 

pursuant to its authority under TILA 

section 105(a). For the reasons 

discussed in the section-by-section 

analysis of each of the amendments to 

§ 1026.20(c), the Bureau believes that 

the amendments are necessary and 

proper to effectuate the purposes of 

TILA, including to assure a meaningful 

disclosure of credit terms, avoid the 

uninformed use of credit, and protect 

consumers against inaccurate and unfair 

credit billing practices, as well as to 

prevent circumvention or evasion of 

TILA. Section 1026.20(c) is further 

authorized under Dodd-Frank Act 

section 1405(b), which permits the 

Bureau to modify disclosure 

requirements where such modification 

is in the interest of consumers and the 

public. For the reasons discussed above 

and below, the Bureau believes that its 

modification of 1026.20(c) serves the 

interests of both consumers and the 

public. 

Section 1026.20(c) also is authorized 

under TILA section 128(f), which 

requires that certain information 

enumerated in the statute be provided to 

consumers every billing cycle in a 

periodic statement and also confers on 

the Bureau the authority to require 

periodic disclosure of ‘‘[s]uch other 

information as the Bureau may prescribe 

in regulations.’’ Although TILA section 

128(f) authorizes the Bureau to require 

that the content of periodic disclosures, 

such as those required by § 1026.20(c), 

be included in the periodic statement, 

for the reasons set forth above and 

below, the Bureau believes that 

providing this information as a separate 

disclosure would better serve 

consumers. Under § 1026.17(a), as 

discussed above, the § 1026.20(c) ARM 

payment adjustment notice must be 

separate and distinct from the periodic 

statement but may be provided to 

consumers together with the periodic 

statement and, depending on the mode 

of delivery, in the same envelope or as 

an additional email attachment. The 

Bureau also believes that the interest of 

consumers and the public interest are 

better served by receiving the 

§ 1026.20(c) ARM notice, within the 

timeframe discussed below, each time 

ARM interest rate adjustments result in 

a corresponding payment change, rather 

than with each billing cycle of the 

periodic statement. 

Further, the Bureau believes, 

consistent with Dodd-Frank Act section 

1032(a), that the formatting 

requirements ensure that the features of 

the ARM loans covered by § 1026.20(c) 

are fully, accurately, and effectively 

disclosed to consumers in a manner that 

permits them to understand the costs, 

benefits, and risks associated with such 

loans, in light of their individual facts 

and circumstances. 

20(c)(1) Coverage 

20(c)(1)(i) In General 

Proposed § 1026.20(c)(1)(i) defined an 

adjustable-rate mortgage or ARM, for 

purposes of § 1026.20(c), as a closed-end 

consumer credit transaction secured by 

the consumer’s principal dwelling in 

which the annual percentage rate may 

increase after consummation. The 

proposed rule used the wording from 

the definitions of ‘‘adjustable-rate’’ and 

‘‘variable-rate’’ mortgage in subpart C of 

Regulation Z to promote consistency 

within the regulation. Proposed 

comment 20(c)(1)(i)–1 explained that 

the definition of ‘‘ARM’’ meant 

‘‘variable-rate mortgage’’ as that term is 

used elsewhere in subpart C of 

Regulation Z, except as would have 

been provided in proposed comment 

20(c)(1)(ii)–3. Having received no 

comment on this issue, the Bureau is 

adopting the final rule and comment 

20(c)(1)(i)–1 is adopted as proposed. 

In its proposal, the Bureau noted that 

current § 1026.20(c) requires disclosures 

only for adjustments to the interest rate 

in variable-rate transactions subject to 

§ 1026.19(b), which is limited to loans 

secured by the consumer’s principal 

dwelling with a term of greater than one 

year. The Bureau proposed deleting the 

cross-reference to § 1026.19(b), which 

otherwise would have expanded the 

scope of § 1026.20(c) to include loans 

with terms of one year or less. Current 

§ 1026.20(c) and comment 20(c)–1 

would have been removed in favor of 

proposed § 1026.20(c)(1)(i) with regard 

to which loans are subject to the interest 

rate adjustment disclosures. Having 

received no comment on the proposed 

elimination of the cross-reference to 

§ 1026.19(b), the Bureau is adopting the 

final rule as proposed. 

The Bureau proposed using the terms 

‘‘adjustable-rate mortgage’’ or ‘‘ARM’’ to 

replace the term ‘‘variable-rate 

transaction’’ in current § 1026.20(c). 

Proposed comment 20(c)(1)(i)–1 

clarified that the term ‘‘variable-rate 

transaction,’’ as used in § 1026.19(b) and 

elsewhere in Regulation Z, was 

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10922 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

synonymous with the term ‘‘adjustablerate mortgage’’ or ‘‘ARM,’’ except where 

specifically distinguished. The Bureau 

proposed this revision because 

‘‘adjustable-rate mortgage’’ and ‘‘ARM’’ 

are the terms commonly used for 

mortgages covered by current and 

proposed § 1026.20(c) and (d). Having 

received no comments on this topic, the 

Bureau is adopting the final rule as 

proposed. 

Proposed comment 20(c)(1)(i)–1 also 

clarified that the requirements of 

§ 1026.20(c)(1)(i) would not be limited 

to transactions financing the initial 

acquisition of the consumer’s principal 

dwelling, but would apply to other 

closed-end ARM transactions secured 

by the consumer’s principal dwelling, 

consistent with current comment 19(b)– 

1 and current § 1026.20(c). Having 

received no comments on this subject, 

the Bureau is adopting the final rule and 

comment 20(c)(1)(i)–1 as proposed. 

20(c)(1)(ii) Exemptions 

In General 

Proposed § 1026.20(c)(1)(ii) set forth 

two exemptions from the disclosure 

requirements of § 1026.20(c). These 

exemptions applied to: (1) Construction 

loans with terms of one year or less; and 

(2) the first adjustment to an ARM if the 

first payment at the adjusted level was 

due within 210 days after 

consummation and the actual, not 

estimated, new interest rate was 

disclosed at consummation in the initial 

ARM interest rate adjustment notice that 

would have been required by proposed 

§ 1026.20(d). Section 1026.20(d) also 

proposed the same construction loan 

exemption. Proposed comments 

20(c)(1)(ii)–1 and –2 provided 

clarification of these exemptions, and 

proposed comment 20(c)(1)(ii)–3 

clarified that certain loans are not ARMs 

if the interest rate or payment change is 

based on factors other than a change in 

the value of an index or a formula. 

In response to comments received 

from industry representatives, the final 

rule expands the construction loan 

exemption to all ARMs with terms of 

one year or less. Industry commenters 

requested other exemptions from 

§ 1026.20(c) that the Bureau declines to 

adopt, for the reasons discussed below. 

Exemptions from the Rule 

ARMs with terms of one year or less. 

The proposed rule would have included 

an exemption for construction ARMs 

with terms of one year or less. As set 

forth in the proposal, the Bureau said it 

believed that the frequent interest rate 

adjustments, multiple disbursements of 

funds, short loan term, and on-going 

communication between the creditor, 

assignee, or servicer and consumer 

distinguish construction loans from 

other ARMs. These loans are meant to 

function as bridge financing until the 

completion of construction and 

permanent financing can be put into 

place. The Bureau stated that consumers 

with construction ARMs were not at risk 

of payment shock as they may be with 

other ARMs where interest rates 

changed less frequently. Moreover, 

given the frequency of interest rate 

adjustments on construction loans, 

creditors, assignees, and servicers 

would have experienced difficulty 

complying with the proposed 

requirement to provide the notice to 

consumers between 60 and 120 days 

before the first payment at a new level 

was due for each adjustment that 

resulted in a corresponding payment 

change. The Bureau concluded that 

requiring § 1026.20(c) notices for these 

loans would not have provided a 

meaningful benefit to the consumer nor 

would it have improved consumers’ 

awareness and understanding of their 

construction ARMs with terms of one 

year or less. 

The Bureau solicited comments on 

whether there were other ARMs with 

terms of one year or less, and whether 

such ARMs should be exempt from the 

requirements of § 1026.20(c). If the time 

period of the advance notice for 

consumers required by the Bureau’s 

proposal was not appropriate for these 

short-term ARMs, the Bureau solicited 

comments on what period would have 

been appropriate that also would have 

provided consumers with sufficient 

notice of the upcoming interest rate 

adjustment and new payment. 

A number of commenters, including 

two large servicers, a home builder trade 

association, and a bank trade 

association, recommended that the 

Bureau expand the proposed short-term 

construction exemption to other shortterm financing originated by consumers 

for consumer purposes. In addition to 

construction ARMs, such ARMs would 

include home improvement, bridge, and 

other short-term consumer loans. 

Commenters echoed the reasoning 

articulated above by the Bureau in favor 

of the construction loan exemption to 

support their recommendation to extend 

the exemption to all consumer ARMs 

with terms of one year or less. They 

reasoned that the short term and 

frequent creditor contact with 

consumers common to these loans 

insulates consumers from the payment 

shock risk occasioned by ARMs without 

these characteristics. Commenters also 

pointed out that the rate changes of such 

short-term ARMs are often tied to 

movement in an index, rather than a 

date certain, making compliance with 

the 60- to 120-day advance notice 

requirement virtually impossible to 

satisfy. One trade association also 

recommended the Bureau clarify that 

the exemption is restricted to ARMs 

taken out by consumers as opposed to 

those made directly to home builders 

and that the exemption extends to 

construction loans structured in a 

variety of ways. 

The Bureau is persuaded that, as in 

the case of construction loans, the 

frequent interest rate adjustments, 

multiple disbursements of funds, short 

loan term, and on-going communication 

between the creditor, assignee, or 

servicer and the consumer distinguish 

these additional forms of short-term 

consumer financing from other ARMs. 

For the same reasoning underpinning 

the Bureau’s decision to adopt an 

exemption for construction ARMs with 

terms of one year of less, the final rule 

exempts from the requirements of 

§ 1026.20(c) all ARMs taken out by 

consumers with terms of one year or 

less. The Bureau notes that the ARM 

rules apply only to consumer loans and 

that comment 20(c)(1)(ii)–1, which the 

Bureau is adopting as proposed, applies 

the standards in current comment 

19(b)–1 for determining the term of a 

construction loan and adds clarification 

regarding what other types of loans 

qualify for the expanded short-term 

ARM exemption. 

New payment due for the first time 

within 210 days after consummation. 

The Bureau also proposed an exemption 

from the requirements of § 1026.20(c) 

for the first ARM adjustment causing a 

change in payment, if the first payment 

at the adjusted level was due within 210 

days after consummation. As clarified 

by proposed comment 20(c)(1)(ii)–2, 

this exemption would have applied only 

if the exact interest rate, not an estimate, 

was disclosed at consummation. For 

ARMs adjusting within six months of 

consummation, which may be within 

210 days before the first payment was 

due at the new level, the disclosures 

proposed by § 1026.20(d) would have 

been required at consummation. The 

Bureau reasoned that having received 

the exact amount of the new interest 

rate and payment at consummation and 

the recency of consummation would 

have obviated the need for the first 

§ 1026.20(c) notice in this circumstance 

because consumers would have been 

apprised of the actual upcoming 

adjustment and payment change by 

receiving the § 1026.20(d) notice just 

months prior to its occurrence. Thus, 

the Bureau reasoned, providing 

§ 1026.20(c) disclosures in these 

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62 74 FR 43232, 43264, 43387 (Aug. 26, 2009). 

circumstances would have been 

duplicative, would not have contributed 

to consumer awareness and 

understanding, and would not have 

provided a meaningful benefit to 

consumers. On the basis of this 

reasoning and in the absence of 

comments on this issue, the Bureau 

integrates this exemption in § 1026.20(c) 

and is adopting comment 20(c)(1)(ii)–2. 

Non-ARM loans. Proposed comment 

20(c)(1)(ii)–3 discussed other loans to 

which the rule would not have applied. 

Proposed comments 20(c)(1)(ii)–3 and 

20(d)(1)(ii)–2 were consistent with 

regard to the loans which would not 

have been subject to the proposed ARM 

disclosure rules. Certain Regulation Z 

provisions treat some of these loans as 

variable-rate transactions, even if they 

are structured as fixed-rate transactions. 

The proposed comment clarified that, 

for purposes of § 1026.20(c), the 

following loans, if fixed-rate 

transactions, would not have been 

considered ARMs and therefore would 

not have been subject to ARM notices 

pursuant to § 1026.20(c): Shared-equity 

or shared-appreciation mortgages; pricelevel adjusted or other indexed 

mortgages that have a fixed rate of 

interest but provide for periodic 

adjustments to payments and the loan 

balance to reflect changes in an index 

measuring prices or inflation; 

graduated-payment mortgages or steprate transactions; renewable balloonpayment instruments; and preferred-rate 

loans. The Bureau observed that the 

particular features of these types of 

loans might trigger interest rate or 

payment changes over the term of the 

loan or at the time the consumer pays 

off the final balance. However, the 

Bureau stated that these changes were 

based on factors other than a change in 

the value of an index or a formula. 

Because the enumerated loans would 

not have been ARMs under the 

proposed rule they would not have been 

covered by proposed § 1026.20(c) and, 

thus, would not have required 

disclosures. 

The Bureau stated that proposed and 

current § 1026.20(c) were generally 

consistent with regard to the ARMs to 

which they would not apply. The 

principal difference was that current 

§ 1026.20(c) applied to renewable 

balloon-payment instruments and 

preferred-rate loans, even if structured 

as fixed-rate transactions, while 

proposed § 1026.20(c) would not have 

applied to such loans. See § 1026.19(b) 

and comment 19(b)–5.i.A and B. Also, 

as discussed above, current § 1026.20(c) 

would not have applied to loans with 

terms of one year or less. This category 

included construction loans, which 

would have been exempted from 

coverage under proposed § 1026.20(c). 

The Bureau also noted that its proposed 

exemption for certain initial 

§ 1026.20(c) ARM adjustments would 

have been inapplicable to the current 

rule because proposed § 1026.20(d) 

would not yet have been implemented 

to replace at consummation the 

disclosures required by current 

§ 1026.20(c) for the first (and all 

ensuing) interest rate adjustments. 

Like proposed comment 20(c)(1)(ii)–3, 

current comment 20(c)–2 clarifies that 

§ 1026.20(c) does not apply to sharedequity or shared-appreciation mortgages 

or to price-level adjusted or other such 

indexed mortgages. The current rule 

cross-references § 1026.19(b) and 

applies to all variable-rate transactions 

covered by that rule. Comment 19(b)–4 

explains that graduated-payment 

mortgages and step-rate transactions 

without variable-rate features are not 

subject to § 1026.19(b). Thus, these 

loans are not subject to current 

§ 1026.20(c) nor would they have been 

subject to the proposed rule. 

The current rule does not mention 

renewable balloon-payment instruments 

and preferred-rate loans, but current 

§ 1026.20(c) applies to these loan 

products through the rule’s crossreference to § 1026.19(b) and therefore 

to comment 19(b)–5.i.A and B. As 

discussed above, under the Bureau’s 

proposal, these loans would not have 

been considered adjustable-rate 

mortgages and therefore would not have 

been subject to the disclosures required 

in proposed § 1026.20(c). The Bureau 

explained that the particular features of 

these types of loans might trigger 

interest rate or payment changes over 

the term of the loan or at the time the 

consumer pays off the final balance but 

that these changes would have been 

based on factors other than a change in 

the value of an index or a formula. To 

illustrate that point, the Bureau 

explained that whether or when the 

interest rate would adjust for a 

preferred-rate loan with a fixed interest 

rate would likely not be knowable to the 

creditor, assignee, or servicer between 

60 and 120 days in advance of the due 

date for the first payment at a new level 

after the adjustment. The Bureau went 

on to explain that this was because the 

loss of the preferred rate would have 

been based on factors other than a 

formula or change in the value of an 

index agreed to at consummation. The 

Bureau pointed out the Board had also 

proposed to remove renewable balloonpayment instruments and preferred-rate 

loans from coverage under § 1026.20(c) 

in its 2009 Closed-End Proposal.62 The 

Bureau received no comments on this 

topic and, thus, is adopting the rule and 

comment 20(c)(1)(ii)–3 as proposed. 

Requested Exemptions 

No small servicer exemption or 

integration of ARM notices into the 

periodic statement. The proposed and 

final rules do not exempt small servicers 

from the requirements of § 1026.20(c) 

and (d), despite the recommendation for 

such an exemption from many 

community banks and credit unions and 

the trade associations representing 

them. Also, after considering comments 

received in response to its solicitation of 

whether § 1026.20(c) and (d) disclosures 

should be permitted to be integrated 

into the periodic statement, the Bureau 

is not adopting this measure. For a full 

discussion of the Bureau’s consideration 

of these issues for both § 1026.20(c) and 

(d), see the section-by-section analysis 

of § 1026.20(d)(1)(ii) below as well as 

the regulatory flexibility analysis in part 

VIII. 

Other exemptions requested. For a 

discussion of requests regarding 

payment-option ARMs and reverse 

mortgage ARMs, see the section-bysection analysis of § 1026.20(d)(1)(ii) 

below. One large bank recommended an 

exemption from the requirements of 

§ 1026.20(c) for consumers in 

bankruptcy, because it said the 

§ 1026.20(c) notice would be redundant 

and conflict with the timing of the 

interest rate adjustment required under 

Federal bankruptcy law 21 days in 

advance of the payment change. The 

Bureau declines to use its exception 

authority for this purpose. The Bureau 

notes that these ARMs are subject to the 

current rule and it does not agree that 

the requirements of § 1026.20(c) are 

redundant or conflict with bankruptcy 

law. On the contrary, providing the 

§ 1026.20(c) notice earlier than the 

timeframe required under the 

bankruptcy law enhances consumer 

protection by providing these 

consumers with additional time to 

adjust to an increase in their mortgage 

payments. 

A large bank requested exemption 

from the requirements of § 1026.20(c) 

when a consumer with an ARM has 

been referred to foreclosure, the servicer 

has determined that the consumer has 

abandoned the property at issue, or the 

servicer has received no payment nor 

had any contact with the consumer in 

more than six months. The Bureau notes 

that these ARMs are subject to the 

current rule and the commenter neither 

showed evidence of undue burden nor 

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63Robert B. Avery et al., The 2007 HMDA Data, 

Fed. Reserve Bull., Dec. 23, 2008, at A107. 

64Nick Timiraos & Ruth Simon, Borrowers Face 

Big Delays in Refinancing Mortgages, Wall St. J., 

May 9, 2012, at A1, available at http://online.wsj.

com/article/SB100014240527023034590045773

64102737025584.html. 

65The Bureau noted that no creditor, assignee, or 

servicer it contacted used a system employing an 

automatic feed of information from the publisher of 

an index source. All data was entered and verified 

manually. 

otherwise set forth reasoning justifying 

scaling back existing consumer 

protections. The Bureau believes that 

even consumers who have ceased 

making payments or abandoned the 

property can benefit from being alerted 

to and understanding the rate at which 

interest is accruing. Further, in some 

cases, the disclosures may cause 

consumers to take action to mitigate 

their losses. 

20(c)(2) Timing and Content 

Rate Adjustment Disclosures 

Timing 

Proposed § 1026.20(c)(2) would have 

required ARM disclosures to be 

provided to consumers between 60 and 

120 days before the first payment at the 

adjusted level was due. Under current 

§ 1026.20(c), notices must be provided 

to consumers between 25 and 120 days 

before the first payment at a new level 

is due. Thus, the proposed rule would 

have increased the minimum advance 

notice to consumers from 25 to 60 days 

before a new payment amount was due 

for the first time. The two circumstances 

under which the rule proposed a 

timeframe that differed from the 

proposed general rule are discussed 

below. Proposed comment 20(c)(2)–1 

would have replaced current comment 

20(c)–1 regarding timing. 

60 to 120 day advance notice. Current 

§ 1026.20(c) requires disclosure of the 

new interest rate and payment between 

25 and 120 days before the first payment 

at the adjusted level is due. Under the 

proposed rule, the notice would have 

been required between 60 and 120 days 

before the first payment at the new level 

is due. The longer timeframe under the 

proposal, the Bureau explained, was 

intended to give consumers more time 

to adjust their finances to the actual 

amount of the increase in their mortgage 

payments caused by a rise in interest 

rates. Further, for consumers who were 

not able to make the higher payment, 

the longer timeframe would have 

provided additional time to refinance or 

take other loss mitigating actions. The 

Bureau stated that the current minimum 

time of 25 days did not give consumers 

sufficient time either to adjust their 

finances or to pursue meaningful 

alternatives such as refinancing, home 

sale, loan modification, forbearance, or 

deed-in-lieu of foreclosure. The Bureau 

cited research conducted for the years 

2004 through 2007 suggesting that a 

requirement to provide ARM adjustment 

disclosures 60, rather than 25, days 

before the first payment at the adjusted 

level is due more closely reflects the 

time needed for consumers to refinance 

a loan.63 In the current market, the 

Bureau said, the nation’s biggest 

mortgage lenders take an average of 

more than 70 days to complete a 

refinance.64

The Bureau said that for most 

adjustable-rate mortgages, the proposed 

60-day minimum timeframe would have 

provided sufficient time for creditors, 

assignees, and servicers to comply with 

the rule. Through outreach to servicers 

of adjustable-rate mortgages, the Bureau 

learned that, for most ARMs, servicers 

knew the index value from which the 

new interest rate and payment would be 

calculated at least 45 days before the 

date of the interest rate adjustment. 

Because interest on consumer mortgage 

credit generally is paid one month in 

arrears, this meant that, for most ARMs, 

servicers would know the index value 

approximately 75 days before the due 

date of the first new payment, 

depending on the number of days in the 

month during which interest began 

accruing at the new rate. 

Creditors, assignees, and servicers 

generally refer to the date the adjusted 

interest rate goes into effect as the 

‘‘change date.’’ The ‘‘look-back period’’ 

is the number of days prior to the 

change date on which the index value 

would be selected which would serve as 

the basis for the new interest rate and 

payment. In general, the Bureau 

observed, interest rate change dates 

occur on the first of the month to 

correspond with payment due dates. 

Thus, the due date for the new payment 

generally would fall on the first of the 

month following the change date. 

Based on outreach conducted by the 

Bureau, it appeared that small servicers 

often sent out the payment change 

notices required by § 1026.20(c) on the 

same day the index value was selected. 

In that case, for a loan with a 45-day 

look-back period, the notice would be 

ready 45 days before the change date 

and, with an approximately 30-day 

billing cycle between the change date 

and the date the first payment at the 

new level would be due, the interest 

rate adjustment notice could be 

provided to the consumer 

approximately 75 days before the new 

payment was due. Under these 

circumstances, the servicer could 

comfortably comply with a rule 

requiring that notice be provided to 

consumers 60 days before the payment 

at a new level was due. 

On the other hand, the Bureau 

observed in the proposed rule that many 

large creditors, assignees, and servicers 

conduct what is referred to as a 

‘‘verification period’’ before sending out 

the notices required by § 1026.20(c). 

This verification period generally takes 

anywhere from three to ten days and 

involves confirming the index rate and 

other quality control measures to ensure 

the notices are correct.65 In these cases, 

for a loan with a 45-day look-back 

period, the payment change notices 

could be provided between 

approximately 42 and 35 days prior to 

the change date, which was either 70 to 

73 or 63 to 66 days before the new 

payment was due, depending on the 

verification period used and the length 

of the billing cycle. Under these 

circumstances, payment change notices 

could be provided to consumers within 

the 60-day period, even assuming a 

verification period of up to 13 days. For 

loans with the shortest verification 

period of three days, the payment 

change notice could be provided to 

consumers 70 days prior to payment 

due at a new level. 

The Bureau therefore concluded that 

for most ARMs, creditors, assignees, and 

servicers could, consistent with their 

current practices, comply with the 60- 

day time period the Bureau proposed. 

The Bureau solicited comments about 

the proposed timing of the § 1026.20(c) 

notice, including the feasibility of 

applying the 60-day period to ARMs 

that have look-back periods of less than 

45 days, whether a look-back period of 

45 days or longer was feasible going 

forward for loan products that currently 

used shorter look-back periods and, if 

not, why not. The Bureau also solicited 

comments on the extent, if any, to 

which the relative length of the lookback period might affect the interest rate 

risk for the creditor, assignee, or 

servicer. It also queried about the 

operational changes that would be 

required to provide § 1026.20(c) notices 

at least 60 days before the first payment 

at a new level was due. Comment was 

requested on any factors that would 

hinder compliance with this timeframe. 

In light of technological and other 

advances since the promulgation in 

1987 of current § 1026.20(c), the Bureau 

also solicited comments on whether, 

and if so why, lengthy verification 

periods were necessary and on the 

feasibility of reducing the length of 

these verification periods. 

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66CoreLogic, TrueStandings Service, available at 

http://www.corelogic.com/about-us/data.aspx#

container-Mortgage (data service accessible only 

through paid subscription) (reflects first-lien 

mortgage loans). 

67Core Logic, TrueStandings Service. 

68Fed. Hous. Fin. Agency (dataset derived from 

FHFA’s Historical Loan Performance (HLP), a 

confidential supervisory database). 

Three consumer groups and a 

research organization suggested 

modifying the proposed rule to allow 

advance notice of at least 70 to 90 days 

or more instead of the proposed 60 days 

advance notice. These entities stated 

that the proposed time was insufficient 

for consumers to take steps to 

ameliorate losses posed by a rise in 

ARM interest rates and payments. 

Because loan modifications and 

refinancings with existing lenders are 

likely to fail, said one consumer group, 

consumers should have additional 

advance warning to allow for 

consideration of additional loss 

mitigation applications with prospective 

lenders. The research organization 

noted that 60 days may be too short in 

a market, such as the current one, in 

which refinancing takes approximately 

70 days. 

The Bureau recognizes that longer 

advance notice provides consumers 

with more of an opportunity to adjust to 

an interest rate increase. The Bureau 

also realizes that, at least in today’s 

market, certain types of transactions, 

such as refinancing or a home sale, often 

cannot be completed within 60 days. 

Nonetheless, the Bureau believes that 

the proposed 60-day notice effectively 

balances consumer protection 

considerations against the practical 

realities and costs that would be 

entailed in requiring even longer notice 

periods. Whether or not consumers can 

complete loss mitigating options 

pursued during this 60-day period, they 

can advance towards that goal and take 

measures to financially prepare for the 

payment change. Further, the advance 

notice shortens the time period in 

which consumers would have to pay at 

a higher level before completing a 

refinancing or other alternative. Also, 

45-day look-back periods are the norm 

for ARM contracts and, once the 

grandfather period expires, their 

dominance in the market likely will 

grow as look-back periods of less than 

45 days become obsolete. As discussed 

above, many entities servicing ARMs 

with look-back periods of less than 45 

days would not be able to meet even the 

70-day, let alone the 90-day or longer, 

deadline recommended. For these 

reasons, the final rule requires that the 

§ 1026.20(c) ARM disclosures be 

provided to consumers at least 60, and 

not 70 or more, days in advance of the 

date the first payment at a new level is 

due after a rate adjustment. The portion 

of proposed comment 20(c)(2)–1 setting 

forth a scenario for providing the 

payment change notices for an ARM 

with a look-back periods of 45 days, is 

removed as unnecessary. The one 

industry commenter addressing the 

issue of verification periods, stated that 

no institution, large or small, should 

require a verification period in excess of 

three days. 

Many industry commenters opposed 

the new timeframe as unworkable— 

even for ARMs with 45-day look-back 

periods. This opposition, however, 

appears to be based on the erroneous 

perception that the proposed rule would 

require them to provide the § 1026.20(c) 

notice between 60 and 120 days before 

the interest rate adjustment date, rather 

than before the date the first payment at 

a new level is due. As discussed above, 

in addition to an ARM’s look-back 

period of 45 days, there is an additional 

30 days before the new payment is due 

because interest for consumer mortgages 

generally is paid one month in arrears. 

One small bank requested 

clarification as to whether ‘‘provided’’ 

means the date the notice is produced 

or mailed. Comment 20(c)(2)–1 is 

modified in the final rule to clarify that 

the requirement that § 1026.20(c) 

disclosures be provided to consumers 

within a certain timeframe means that 

the disclosures must be delivered or 

placed in the mail within that 

timeframe. Thus, creditors, assignees, 

and servicers need not calculate 

delivery or mailing time into the 60- to 

120-day timeframe and those servicing 

ARMs with look-back periods of 45 days 

or longer can comply with the proposed 

timeframe. The final comment also is 

modified to clarify that the timeframe 

excludes courtesy, as well as grace, 

periods. 

Some industry commenters opposed 

revision of § 1026.20(c), in part, on the 

grounds that, in their view, the current 

rule provides for sufficient notice to 

consumers, the Bureau had not shown 

that consumers need lengthier advance 

warning, and the additional advance 

warning was an insignificant change or 

would not provide sufficient time for 

consumers to refinance in any event. 

Two national trade groups and a credit 

union opposed the revision of the rule 

because, among other things, they 

claimed that the cost of an ARM product 

increases with the length of its lookback period. They also stated that it 

would be difficult and costly to change 

from the current to the proposed notice. 

For the reasons articulated above in 

the proposed rule and for the following 

reasons, the Bureau is adopting 

§ 1026.20(c) as proposed with regard to 

the advance notice requirements. The 

Bureau also is adopting comment 

20(c)(2)–1, with modification to clarify, 

that ‘‘provide’’ means deliver or place in 

the mail and to clarify that the 60- to 

120-day timeframe excludes any 

courtesy, as well as grace, period. 

Through the first eight months of 

2012, ARMs financed approximately 10 

percent of the outstanding balance of 

new home-purchase.66 Of the three 

million ARMs with outstanding 

balances at the end of October 2012, the 

Bureau was able to ascertain the length 

of the look-back period for the 1.9 

million ARMs guaranteed by Freddie 

Mac, Fannie Mae, or Ginnie Mae.67

Seventy-five percent of those ARMs 

have 45-day look-back periods. Thus, 

creditors, assignees, and servicers can 

comply with the new 60- to 120-day 

timeframe without changing the lookback periods of their ARMs for 75 

percent of the approximately 2/3s of all 

outstanding ARMs for which the length 

of the look-back period is known. 

The commenters stating that the cost 

of an ARM increases with the length of 

the look-back period did not submit any 

data to support this point. The Bureau’s 

research found no causal relationship 

between the level of an ARM’s margin 

and a 15-, 30- or 45-day look-back 

period, when controlling for consumer 

characteristics such as Loan-to-Value 

(LTV), credit score, and Debt-to-Income 

(DTI) ratios.68 Thus, the Bureau believes 

it is unlikely that, for the minority of 

ARM products with look-back periods 

of 15 or 30 days, requiring that new 

ARMs incorporate a slightly longer lookback period will meaningfully impact 

the manner in which the product is 

priced. For example, it is unlikely that 

a creditor offering a 3/1 ARM could 

reasonably determine a substantial 

difference in valuation at origination 

between an interest rate adjustment 

1,050 days in the future as opposed to 

1,065 days in the future. 

The Bureau disagrees with 

commenters stating that the current rule 

provides for sufficient notice to 

consumers, that the Bureau has not 

shown that consumers need lengthier 

advance warning, or that the additional 

advance warning would not provide 

sufficient time for consumers to pursue 

alternatives such as refinancing. 

Knowing the exact amount of their 

interest rate and payment between 60 

and 120 days before the first new 

payment is due allows consumers more 

time to sell their homes or seek loss 

mitigating alternatives such as 

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10926 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

refinancing, loan modification, or deedin-lieu of foreclosure—or at least to 

adjust their finances to an upcoming 

increase in rate and payment. The 

Bureau believes the current rule does 

not provide consumers with sufficient 

time to pursue these loss mitigation 

options. While each consumer electing 

to pursue alternatives may not be able 

to finalize a loss mitigation option by 

the time the first payment at the new 

level is due, increasing the minimum 

advance notice from 25 to 60 days 

provides consumers with enough time 

to at least make significant progress 

toward, if not complete, a refinancing or 

a loss mitigation option, or adjust their 

finances in anticipation of the increased 

payment. As a result, even for 

consumers who cannot complete an 

alternative within 60 days, the 

additional advance notice shortens the 

time period in which consumers would 

have to pay at a higher level before 

completing a refinancing or other 

alternative. 

25 to 120 day advance notice 

permitted for some ARMs. As discussed 

above, in putting forward its proposal, 

the Bureau recognized that some ARMs 

have look-back periods shorter than 45 

days. Specifically, the Bureau noted that 

ARMs backed by the FHA and VA have 

look-back periods of 15 or 30 days. The 

Bureau also noted that for some ARMs 

the adjustment is based on the 

published index as of the first business 

day of the month preceding the effective 

date of the interest rate change. Because 

the first day of that month may not fall 

on a business day, the look-back period 

may be less than 30 days, excluding any 

verification period. In two 

circumstances, the Bureau’s proposal 

would have permitted a time period 

other than between 60 and 120 days. 

First, the Bureau proposed to alter the 

timing requirements for ARMs adjusting 

for the first time within 60 days of 

consummation where the new interest 

rate disclosed at consummation 

pursuant to § 1026.20(d) was an 

estimate, rather than the actual rate that 

would go into effect when the ARM 

adjusts. (Under the proposal, if the 

actual rate had been disclosed at 

consummation, such loans would have 

been exempt from the rule pursuant to 

§ 1026.20(c)(1)(ii)(B) The Bureau noted 

that compliance with the 60- to 120-day 

timeframe would not have been possible 

for such loans. For this reason, for such 

loans, the Bureau proposed that the 

§ 1026.20(c) payment change notice be 

provided to consumers as soon as 

practicable, but not less than 25 days 

before the first payment at a new level 

was due. The Bureau received no 

comments on this altered timeframe and 

is adopting the rule as proposed. 

Second, the Bureau proposed 

retention of the current timeframe of 

between 25 and 120 days before the first 

payment at the new level is due for 

ARMs with look-back periods of less 

than 45 days originated before July 21, 

2013. The Bureau realized that the 

creditors, assignees, and servicers of 

existing ARMs with shorter look-back 

periods would not have been able to 

comply with the proposed timeframe 

and would need some time to adjust 

their products so that they could 

originate ARMs that could comply. 

Although this timeframe would have 

provided less advance notice to some 

consumers than generally provided 

under the proposed rule, the Bureau 

proposed to grandfather these ARMs to 

prevent altering existing contractual 

agreements regarding the look-back 

period. The Bureau made clear that after 

July 21, 2013, new ARMs would have 

had to be structured to permit 

compliance with the 60- to 120-day 

timeframe. The Bureau solicited 

comments regarding this proposed 

grandfather period. It also queried 

whether the proposed, or some other, 

expiration date for the grandfather time 

period would be preferable. Finally, the 

Bureau solicited comments on whether 

other ARMs should be allowed to 

comply with a 25- to 120-day notice 

period. 

Many industry entities commented on 

the proposed grandfather period for 

ARMs with look-back periods of less 

than 45 days and on the issue of an 

effective date for the final TILA 

mortgage servicing rules in general and 

the ARM rules in particular. Two credit 

unions recommended against 

grandfathering; one stated that it was 

unnecessary and the other that it would 

create dual procedures for § 1026.20(c) 

notices. Two trade associations noted 

that their members would have to 

maintain bifurcated system 

functionalities for grandfathered versus 

non-grandfathered ARMs, which could 

lead to potential errors and reduced 

customer service. A large bank 

recommended allowing two timeframes 

for ARMs: the 60-day minimum advance 

notice for ARMs with look-back periods 

of 45 days or more and the 25-day 

minimum advance notice for ARMs 

with shorter look-back periods. That 

bank went on to say that no grandfather 

period was needed because, once 

government agencies no longer insured 

ARMs with look-back periods of less 

than 45 days, ARMs with short lookback periods would disappear. A large 

non-bank servicer agreed with the 

Bureau’s proposed timing. One large 

bank recommended grandfathering 

ARMs where it would have to determine 

an index rate on a business day and 

thus, must look back 46 or 47 days. The 

Bureau notes that it received no other 

comments on this last point and refers 

to its analysis above illustrating how 

ARMs with look-back periods of 45 days 

or longer can comply with the proposed 

rule. 

Industry commenters generally 

recommended an implementation 

period longer than one year. They 

stressed the added burden of having to 

simultaneously implement other 

Bureau-mandated rules. Generally, 

commenters said that one year was 

insufficient for servicers to design, 

develop, and implement the required 

system enhancements to provide the 

capability to generate the new 

automated 60-day ARM notices and to 

permit time for necessary adjustments 

by other parties, such as lenders, 

technology and form vendors, and 

attorneys. A large bank reported that 

these system changes would include 

reprogramming origination and 

servicing systems to board loans 

originated after the grandfather period. 

In general, commenters recommended 

an implementation period of between 18 

to 30 months after publication of the 

final rule. 

Many commenters recommended that 

the Bureau tie the grandfather period to 

the effective date of the final rule rather 

than impose a date certain. Several 

large- and medium-sized servicers and 

national industry trade groups 

recommended the Bureau grandfather 

all ARMs with look-back periods of less 

than 45 days until one year or longer 

after the GSEs, FHA, and VA issued 

final changes to their mortgage 

contracts. This way, they said, creditors 

could make the changes necessary to 

issue ARMs that could comply with 

requirements of § 1026.20(c). Other 

commenters requested tying the 

grandfather deadline to when investors 

in GSEs and government mortgage 

programs have completed the required 

changes to their guidelines because 

creditors, in turn, have to revise their 

products and work with investors to 

update their documents and guidelines. 

One large bank recommended an 18 to 

24 month phase-in period, taking into 

account any additional time necessary 

for the FHA, VA, and GSEs to adjust 

their loan contracts, with a minimum of 

at least 12 months for compliance after 

they finalize the required changes. This 

bank suggested the alternative of making 

compliance voluntary 12 months after 

publication of the final rule in the 

Federal Register and mandatory by July 

2014. 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10927 

The Bureau understands that creditors 

originating loans insured by FHA and 

VA must satisfy the requirements 

established by those agencies. These 

creditors will not be able to originate 

FHA or VA ARMs with look back 

periods of 45 days or longer until those 

agencies modify their policies governing 

look-back periods. Based on discussions 

with those agencies, the Bureau has 

decided to grandfather ARMs with lookback periods of less than 45 days 

originated prior to one year after the 

effective date of the final rule. Thus, for 

such ARMs, the final rule provides a 

year beyond the one year 

implementation period for the transition 

to ARMs with look-back periods of 45 

days or more. 

Consultation with government 

agencies that guarantee ARMs with 

look-back periods of less than 45 days 

revealed, in addition to there being no 

substantive reason to retain those 

specific look-back periods, an 

expectation that they could complete 

their processes, including any required 

rulemaking, well within the grandfather 

period. In addition, the Bureau expects 

that any other investors or guarantors 

will make conforming changes to the 

look-back periods of their loan products 

by the time the grandfather period 

expires. In light of this, the Bureau 

believes that establishing a date certain 

for the expiration of the grandfather 

period is preferable to adopting an 

indeterminate period and pinning 

consumer protections to the indefinite 

future date. To provide consumers with 

the protections contemplated by 

§ 1026.20(c) and for the reasons 

discussed above, the Bureau is 

extending the proposed grandfather 

period by 18 months such that 

§ 1026.20(c) grandfathers ARMs with 

look-back periods of less than 45 days 

originated prior to one year after the 

effective date of the final rule, i.e., such 

ARMs originated prior to January 10, 

2015. See part VI below for a discussion 

of the effective date for the 2013 TILA 

Servicing Rule. 

Four trade associations and a credit 

union recommended grandfathering all 

ARMs originated prior to the effective 

date of the rule. The Bureau believes 

that, for all the reasons discussed 

throughout the section-by-section 

analysis, consumers with ARMs 

originated prior to the effective date of 

the rule but which, after that date, have 

an interest rate adjustment with a 

corresponding payment change can 

benefit from the consumer protections 

afforded by § 1026.20(c) as much as 

consumers with ARMs originated after 

the effective date. In many of these 

cases, adjustments will occur a year or 

more after the effective date of the rule, 

exposing those consumers to the same 

risk of payment shock as those whose 

ARMs originate after the effective date. 

Therefore, once the final rule takes 

effect, except for ARMs with look-back 

periods of less than 45 days covered by 

the grandfather period, it applies to all 

ARMs with interest rate adjustments 

causing payment changes. 

A large bank affiliate originating 

mortgage loans to clients of its affiliated 

wealth management businesses 

submitted comments in favor of 

retaining the 25- to 120-day compliance 

period to preserve short-term index 

loans, i.e., ARMs with frequent interest 

rate adjustments. The commenter stated 

that these loans are in demand by 

certain sectors of the marketplace and 

offer benefits to those consumers. 

Because the interest rates of most shortterm index loans adjust at least 

monthly, under the proposed 60- to 120- 

day timeframe, creditors would have no 

choice but discontinue such products. 

The Bureau agrees with the 

commenter’s rationale for preserving 

these frequently adjusting ARMs. Unlike 

most ARMs with interest rates that 

adjust annually or every three, five, 

seven, or ten years, short-term index 

loans adjust so often as to obviate the 

risk of payment shock. Consumers 

whose interest rates adjust monthly run 

little risk of surprise at a changed 

payment compared to consumers whose 

ARM interest rates have not adjusted for 

one, three, five, or seven years before 

the payment change. Moreover, each 

interest rate adjustment for such loans 

occurs only 30 days or so after the last 

adjustment, further insulating these 

consumers from the market fluctuations 

more likely to occur over the course of 

a year or more. In sum, short-term index 

ARMs are not the types of loans the 

Bureau intends to target with the 

requirement of § 1026.20(c) to provide 

consumers with between 60 and 120 

days of advance notice prior to the first 

due date of a new payment after an 

interest rate adjustment causing a 

payment change. For the above-stated 

reasons, the final rule permits the notice 

required by § 1026.20(c) to be provided 

to consumers between 25 and 120 days 

before the first payment at new level is 

due after an interest rate adjustment for 

ARMs with a uniform schedule of 

interest rate adjustments occurring 

every 60 days or less, which, as clarified 

in comment 20(c)(2)–1, means ARMs 

that adjust regularly at a maximum of 

every 60 days and that this time period 

excludes any grace or courtesy periods. 

The Bureau also proposed to alter the 

timing requirements for ARMs adjusting 

for the first time within 60 days of 

consummation where the interest rate 

disclosed at consummation was an 

estimate, rather than the actual interest 

rate. (Under the proposal, if the actual 

interest rate had been disclosed at 

consummation, such ARMs would have 

been exempted from the rule pursuant 

to proposed § 1026.20(c)(1)(ii)(2). The 

Bureau noted that creditors, assignees, 

and servicers of such ARMs would not 

have been able to comply with the 60- 

day timeframe. For such loans, the 

disclosures proposed by § 1026.20(c) 

would have had to be provided to 

consumers as soon as practicable, but 

not less than 25 days before a payment 

at a new level was due. The Bureau 

received no comments on this topic and 

is adopting the rule as proposed. 

20(c)(2)(i) 

Statement Regarding Changes to Interest 

Rate and Payment 

For interest rate adjustments resulting 

in corresponding payment changes, 

proposed § 1026.20(c)(2)(i)(A) would 

have required creditors, assignees, and 

servicers to inform consumers that, 

under the terms of their adjustable-rate 

mortgage, the specific period in which 

their current interest rate has been in 

effect would end on a certain date and 

that their interest rate and mortgage 

payment will change on that date. This 

information, the Bureau stated, is 

similar to the pre-consummation 

disclosures required by current 

§ 1026.19(b)(2)(i) and § 1026.37(j) as 

proposed in the 2012 TILA–RESPA 

Proposal. Proposed comment 

20(c)(2)(ii)(A)–1 clarified that the 

current interest rate was the interest rate 

that would be in effect on the date of the 

disclosure. 

Proposed § 1026.20(c)(2)(i)(B) would 

have required the ARM payment change 

notices to include the dates of the 

impending and future interest rate 

adjustments. Proposed 

§ 1026.20(c)(2)(i)(C) also would have 

required disclosure of any other loan 

changes taking place on the same day of 

the rate adjustment, such as changes in 

amortization caused by the expiration of 

interest-only or payment-option 

features. 

The Bureau explained that the first 

ARM model form it tested did not 

contain the statement informing 

consumers of impending and future 

changes to their interest rate and the 

basis for these changes. Although 

participants understood that their 

interest rate would adjust and this 

would affect their payment, they did not 

understand that these changes would 

occur periodically, subject to the terms 

of their mortgage contract. Inclusion of 

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10928 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

69Macro Report, at vii. 70Macro Report, at vii. 

71Macro Report, at vii–viii. The allocation table 

for interest-only and negatively-amortizing ARMs 

was revised after the third and final round of testing 

and is identical in both § 1026.20(c) and (d). 

this statement in the second round of 

testing successfully resolved this 

confusion. All but one consumer tested 

in rounds two and three of testing 

understood that, under the scenario 

presented to them, their interest rate 

would change on an annual basis.69 In 

the absence of comments regarding this 

provision, the Bureau is adopting the 

final rule as proposed. 

20(c)(2)(ii) 

Table With Current and New Interest 

Rates and Payments 

Proposed § 1026.20(c)(2)(ii) would 

have required disclosure of the 

following information in the form of a 

table: (A) The current and new interest 

rates; (B) the current and new periodic 

payment amounts and the date the first 

new payment is due; and (C) for 

interest-only or negatively-amortizing 

payments, the amount of the current 

and new payment allocated to interest, 

principal, and property taxes and 

mortgage-related insurance, as 

applicable. The information in this table 

would have appeared within the larger 

table containing all the required 

disclosures. 

This table would have followed the 

same order as, and had headings and 

format substantially similar to, those in 

the table in model forms H–4(D)(1) and 

(2) in appendix H of subpart C. The 

Bureau stated that it confirmed through 

consumer testing that, when presented 

with information in a logical order, 

participants more easily grasped the 

complex concepts contained in the 

proposed § 1026.20(c) notice. For 

example, the form would have begun by 

informing consumers of the basic 

purpose of the notice: Their interest rate 

was going to adjust, when it would 

adjust, and the adjustment would 

change their mortgage payment. This 

introduction would have been 

immediately followed by a visual 

illustration of this information in the 

form of a table comparing consumers’ 

current and new interest rates. Based on 

its consumer testing, the Bureau stated 

it believed that the understanding of the 

consumers tested was enhanced by 

presenting the information in a simple 

manner, grouped together by concept, 

and in a specific order that allows 

consumers the opportunity to build 

upon knowledge gained. For these 

reasons, the Bureau proposed that 

creditors, assignees, and servicers 

disclose the information in the table as 

set forth in model forms H–4(D)(1) and 

(2) in appendix H. 

Proposed § 1026.20(c)(2)(ii) would 

have replaced current § 1026.20(c)(1) 

and (4), but would have retained the 

requirement to disclose the current and 

new interest rates and the amount of the 

new payment. Proposed 

§ 1026.20(c)(2)(ii)(A) also would have 

required disclosure of the date when the 

consumer would have to start making 

the new payment and proposed 

comment § 1026.20(c)(2)(ii)(A)–1 would 

have clarified that the new interest rate 

would have had to be the actual rate, 

not an estimate. Proposed 

§ 1026.20(c)(2)(ii) also replaced the 

language ‘‘prior’’ and ‘‘current’’ in the 

current rule with the terms ‘‘current’’ 

and ‘‘new,’’ respectively, and removed 

comment 20(c)(2)–1 which, among other 

things, used the terms ‘‘prior’’ and 

‘‘current.’’ This change was designed to 

make clear that ‘‘current’’ meant the 

interest rate and payment in effect prior 

to the interest rate adjustment and 

‘‘new’’ meant the interest rate and 

payment resulting from the interest rate 

adjustment. 

Proposed comment 20(c)(2)(ii)(A)–1 

defined the term ‘‘current’’ interest rate 

as the one in effect on the date of the 

disclosure. This more succinct 

definition replaced the lengthy 

definition of ‘‘prior interest rates,’’ 

which current comment 20(c)(1) defines 

as the interest rate disclosed in the last 

notice, as well as all other interest rates 

applied to the transaction in the period 

since the last notice, or, if there had 

been no prior adjustment notice, the 

interest rate applicable at 

consummation and all other interest 

rates applied to the transaction in the 

period since consummation. 

In all rounds of testing, consumers 

were presented with model forms with 

tables depicting a scenario in which the 

interest rate and payment were 

projected to increase as a result of the 

adjustment. All participants in all 

rounds of testing understood that their 

interest rate and payment were 

projected to increase and when these 

changes would occur.70

Current ARM notices are not required 

to show the allocation of payments 

among principal, interest, and escrow 

accounts for any ARM. The Bureau 

proposed including this information in 

the table for interest-only and 

negatively-amortizing ARMs only. The 

Bureau stated it believed that providing 

the payment allocation would have 

helped consumers better understand the 

risk of these products by demonstrating 

that their payments would not have 

reduced the loan principal. The Bureau 

also said that providing the payment 

allocation would have helped 

consumers understand the effect of the 

interest rate adjustment, especially in 

the case of a change in the ARM’s 

features coinciding with the interest rate 

adjustment, such as the expiration of an 

interest-only or payment-option feature. 

Because payment allocation might 

change over time, the rule would have 

required disclosure of the expected 

payment allocation for the first payment 

period during which the adjusted 

interest rate would have applied. 

The Bureau explained that the notice 

disclosing an allocation of payment for 

interest-only or negatively-amortizing 

ARMs was not tested until the third 

round of testing. The notice tested set 

forth the following scenario to 

consumers: The first adjustment of a 

3/1 hybrid ARM—an ARM with a fixed 

interest rate for three years followed by 

annual interest rate adjustments—with 

interest-only payments for the first three 

years. On the date of the adjustment, the 

interest-only feature would expire and 

the ARM would become amortizing. 

Only about half of the participants 

understood that their payments were 

changing from interest-only to 

amortizing. Participants generally 

understood the concept of allocation of 

payments but were confused by the 

table in the notice that broke out 

principal and interest for the current 

payment, but combined the two for the 

new amount. As a result, this table was 

revised so that separate amounts for 

principal and interest were shown for 

all payments.71

The Bureau recognized that certain 

Dodd-Frank Act amendments to TILA 

pose restrictions on the origination of 

non-amortizing and negativelyamortizing loans. For example, TILA 

section 129C requires creditors to 

determine that consumers have the 

ability to repay the mortgage loan before 

lending to them and that this assumes 

a fully-amortizing payment. The Bureau 

thought it possible that this law and its 

implementing regulation would restrict 

the origination of risky mortgages such 

as interest-only and negativelyamortizing ARMs. 

The Bureau stated that other DoddFrank Act amendments to TILA, such as 

the proposed periodic statement 

provisions discussed below, would 

provide payment allocation information 

to consumers for each billing cycle. 

Thus, consumers with interest-only or 

negatively-amortizing loans, or those 

who might obtain such loans in the 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10929 

72Macro Report, at 15. 73Macro Report, at viii. 

future, would receive information about 

the interest-only or negativelyamortizing features of their loans 

through the payment allocation 

information in the periodic statement. 

Also, as stated above, consumer testing 

showed that participants tested were 

confused by the allocation table. In view 

of these changes to the law and the 

outcome of consumer testing, the 

Bureau solicited comments on whether 

to include allocation information for 

interest-only and negatively-amortizing 

ARMs in the proposed table described 

above. 

A trade association generally 

supported the tabular format, stating 

that consumer testing has repeatedly 

proven its effectiveness. A large bank 

recommended eliminating altogether the 

table with the current and new interest 

rates and payments because, it said, the 

table tested poorly with consumers and 

would confuse them as well as be 

duplicative of the proposed periodic 

statement. Other commenters 

recommended eliminating only the 

portion of the table disclosing allocation 

information for interest-only and 

negatively-amortizing ARMs while one 

large bank commended the Bureau for 

adding these disclosures to the 

§ 1026.20(c) notice. Those commenters 

in favor of eliminating allocation 

information for these ARMs said the 

information was not fully consumer 

tested, would be based on projections 

that would confuse and distract 

consumers, and would require costly 

software upgrades. Most of these 

commenters recommended substituting 

the statement for interest-only and 

negatively-amortizing ARMs required by 

§ 1026.20(c)(2)(vi) in place of the 

allocation information; one large bank 

suggested expanding the language in 

these statements as a substitute for the 

allocation information. The large bank 

also said the allocation information 

would confuse consumers because, in 

the case of a negatively-amortizing 

ARM, the portion allocated to principal 

would have to be expressed as a 

negative number. One trade association 

recommended allowing estimated 

escrow payments for the new payment 

allocation table, which is what the rule 

proposed and the Bureau is adopting in 

§ 1026.20(c)(2)(ii)(C). 

The Bureau is adopting 

§ 1026.20(c)(2)(ii) as proposed for the 

reasons set forth in the proposal and 

those set forth below. The table is the 

centerpiece of the § 1026.20(c) 

disclosure and contains some of the 

disclosure’s most important 

information: The consumers’ upcoming 

new interest rate and payment set forth 

next to their current rate and payment, 

such that consumers can make 

comparisons. This information informs 

consumers of the exact amount of the 

new mortgage payment the consumer 

must make starting in the next few 

months and the table allows easy 

comparison with their current charges, 

helping consumers decide on how best 

to proceed. Also, the periodic statement 

will provide consumers with only part 

of the information in the table: The date 

after which the interest rate will adjust 

and the amount of the next payment. 

Moreover, the periodic statement 

generally would provide consumers 

with a month warning before a payment 

increase, rather than the minimum 60- 

day advance notice required by 

§ 1026.20(c). 

Because interest-only and negativelyamortizing ARMs pose more potential 

risk to consumers than conventional 

ARMs, the Bureau believes that 

providing consumers with the specific 

payment allocations for when their 

interest rates adjust will provide a 

comprehensible snapshot of the 

consequences of the upcoming 

adjustments and better enable those 

consumers to manage their mortgages. 

The table itself tested well with 

consumers; the allocation breakdown 

for the new payment for interest-only 

and negatively-amortizing ARMs did 

not test as well. As discussed above, the 

Bureau revised the model forms to 

address that problem. Moreover, the 

periodic statement contains a similar 

allocation table for the upcoming 

mortgage payment and testing of the 

periodic statement went well and raised 

no concerns regarding projected 

principal, interest, and escrow— 

including for payment-option loans.72

In addition, as set forth in the periodic 

statement sample form in appendix H– 

30(C), the allocation of principal for 

negatively-amortizing loans is zero, and 

not a negative number. 

Also, the proposed rule clearly set 

forth the bases upon which to make the 

projections for the allocation table for 

these ARMs, as well as for loan 

balances. See the section-by-section 

analysis of § 1026.20(c)(2)(v) below 

regarding loan balances. For certain 

consumers, such as those who are 

delinquent, who may choose to pay 

ahead, or who have payment-option 

ARMs, the projected amount may not 

prove to be the actual amount. However, 

servicers routinely project expected 

payment allocations and loan balances 

any time they provide consumers with 

a future payment amount, such as in the 

periodic statement. The Bureau also 

notes that the use of allocation tables 

showing projected payments is an 

established practice in Regulation Z, as 

illustrated, for example, in appendices 

H–4(E) and (F). Also, the Bureau expects 

the origination of these risky loans will 

continue to decline in light of the 

qualified mortgage rules implementing 

TILA section 129C, thereby reducing the 

burden on servicers to provide the 

§ 1026.20(c) allocation table. For these 

reasons and the reasons set forth in the 

proposed rule, the Bureau is adopting 

the final rule as proposed. The Bureau 

is adopting comment 20(c)(2)(ii)(A)–1 

with the additional clarification that 

creditors, assignees, and servicers may 

round the interest rate, pursuant to the 

requirements of the ARM contract. 

20(c)(2)(iii) 

Explanation of How the Interest Rate Is 

Determined 

Proposed § 1026.20(c)(2)(iii) would 

have required the ARM disclosures to 

explain how the interest rate was 

determined. Consumer testing revealed 

that participants generally had difficulty 

understanding the relationship of the 

index, margin, and interest rate.73 The 

Bureau said this was the reason it 

proposed a relatively brief and simple 

explanation that the new interest rate 

would be calculated by taking the 

published index rate and adding a 

certain number of percentage points, 

called the ‘‘margin.’’ Proposed 

§ 1026.20(c)(2)(iii) also would have 

required disclosure of the specific 

amount of the margin. 

The Bureau noted that the proposed 

explanation of how the consumer’s new 

interest rate was determined, such as 

adjustment of the index by the addition 

of a margin, mirrored the preconsummation disclosure required 

around the time of application by 

current § 1026.19(b)(2)(iii) and TILA 

section 128A requirements for initial 

interest rate disclosures. It also 

paralleled the pre-consummation 

disclosure of the index and margin in 

the 2012 TILA–RESPA Proposal. 

Proposed § 1026.20(c) also would have 

required disclosure of the index and 

published source of the index or 

formula, as required in other disclosures 

by § 1026.19(b)(2)(ii) and TILA section 

128A. 

The proposed rule would have 

replaced current § 1026.20(c)(2), which 

required disclosure of the index values 

upon which the ‘‘current’’ and ‘‘prior’’ 

interest rates are based. The Bureau said 

that it believed that providing 

consumers with index values is less 

valuable than providing them with their 

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74Macro Report, at viii. 

75Carryover interest, or foregone interest rate 

increases, is the amount of interest rate increase 

foregone at any ARM interest rate adjustment that, 

subject to rate caps, can be added to future interest 

rate adjustments to increase, or to offset decreases 

in, the rate determined by using the index or 

formula. 

76Because the issue of carryover interest arose 

first in the context of the explanation of how the 

interest rate is determined, the Bureau addresses 

the issue in depth here rather than in the following 

section § 1026.20(c)(2)(iv), Rate and Payment Limits 

and Unapplied Carryover Interest. 

actual interest rates. The Bureau also 

proposed removal of current comment 

20(c)(2)–1, which addressed the 

requirement to disclose current and 

prior interest rate. 

Consumer testing indicated that the 

explanation helped participants better 

understand the relationship between 

interest rate, index, and margin. As 

stated in the proposal, it also helped 

dispel the notion held by many 

consumers in the initial rounds of 

testing that creditors subjectively 

determined their new interest rate at 

each adjustment.74 The Bureau stated 

that it believed the proposed rule and 

forms struck an appropriate balance 

between providing consumers with key 

information necessary to understand the 

basis of their ARM interest rate 

adjustment without overloading 

consumers with complex and confusing 

technical information. 

The Bureau received one comment 

regarding the explanation of how the 

interest rate is determined. A large bank 

recommended including adjustments to 

the index other than the margin, such as 

the addition of previously unapplied 

carryover interest.75 The Bureau points 

out that the proposed rule contemplated 

including the addition of previously 

unapplied carryover interest increase in 

the explanation of how the new 

payment is calculated. The Bureau notes 

that, in the proposed rule, the new 

payment explanation came after the 

explanation of how the new interest rate 

is calculated. The Bureau agrees with 

the commenter that logically, and for 

accuracy and completeness, any 

previously unapplied carryover interest 

added to the index and margin to 

formulate the new interest rate should 

be disclosed to the consumer in the 

explanation of how the interest rate is 

calculated, rather than initially 

disclosing it in the later explanation of 

how the new payment is calculated. 

The Bureau also notes that proposed 

§ 1026.20(c)(2)(iv) would have required, 

among other things, disclosure of any 

previously unapplied carryover interest 

at each adjustment, as applicable. The 

Bureau solicited comments regarding 

this proposed requirement.76 A credit 

union and a State trade association 

recommended that the Bureau eliminate 

disclosure of carryover interest 

altogether, asserting that it is too 

complex and unnecessary for consumers 

to understand and it would distract 

consumers from other information 

contained in the § 1026.20(c)(2) notices. 

A large servicer suggested the 

alternative of including this information 

in the periodic statement instead of the 

ARM disclosure. 

The Bureau does not agree with these 

commenters. To provide consumers 

with candid and accurate information 

about the adjustments to their 

adjustable-rate mortgages, the Bureau 

has decided to issue the final rule 

including disclosure of applicable 

information regarding carryover interest. 

Excluding this information would 

present consumers with an incomplete 

and incorrect portrait of their loan. 

Complexity is inherent in a disclosure 

dealing with indices, margins, adjusting 

interest rates, and changing payments. 

The Bureau has attempted to distill 

these complex concepts into their 

simplest elements without 

compromising substance. The Bureau 

hopes that consumers confused by the 

disclosure of the application of 

previously foregone interest rate 

increases, or any of the other complex 

concepts addressed in the § 1026.20(c) 

disclosure, will consult with the 

servicer, homeownership counselors or 

other housing finance professionals, or 

knowledgeable personal contacts. 

Because the Bureau agrees with the 

large bank commenter that informing 

consumers of the application of 

carryover interest in the explanation of 

how their new interest rate is calculated 

is both logical and would improve the 

accuracy of the disclosure, the Bureau is 

adopting § 1026.20(c)(2)(iii) with the 

addition of information regarding the 

adjustments to the index other than the 

margin, such as the application of 

previously unapplied carryover interest. 

The final rule modifies the proposed 

rule by requiring disclosure of the type 

and amount of any adjustment to the 

index including, in addition to any 

margin, the application of previously 

foregone interest rate increases. Because 

the final rule requires disclosure of this 

information in § 1026.20(c)(2)(iii), the 

Bureau removes as repetitive the 

proposed disclosure in 

§ 1026.20(c)(2)(v) of the amounts of the 

margin, applied carryover interest, or 

any other adjustment to the index. The 

Bureau also is issuing the rule with 

comment 20(c)(2)(v)(B)–1, which 

provides clarification about the 

application of previously foregone 

interest rate increases, or applied 

carryover interest. 

20(c)(2)(iv) 

Rate and Payment Limits and Unapplied 

Carryover Interest 

Proposed § 1026.20(c)(2)(iv) would 

have required the disclosure of any 

limits on the interest rate or payment 

increases at each adjustment and over 

the life of the loan. It also would have 

required disclosure of the extent to 

which the creditor, assignee, or servicer 

had foregone any increase in the interest 

rate due to a limit, called unapplied 

carryover interest. Disclosure of rate 

limits is not required by the current 

rule. The Bureau stated that it believed 

that knowing the limitations of their 

ARM rates and payments would help 

consumers understand the 

consequences of each interest rate 

adjustment and weigh the relative 

benefits of pursuing alternatives. The 

Bureau gave the example that if an 

adjustment caused a significant increase 

in the consumer’s payment, knowing 

how much more the interest rate or 

payment could increase would better 

inform the consumer’s decision whether 

or not to seek alternative financing. 

The Bureau pointed out that proposed 

§ 1026.20(c)(2)(iv) would have required, 

as current § 1026.20(c)(3) requires, 

disclosure of the extent to which the 

creditor, assignee, or servicer had 

foregone an increase in the interest rate 

due to a limit, called unapplied 

carryover interest, and the earliest date 

such foregone interest rate increase 

could be applied. Proposed comment 

20(c)(2)(iv)–1 regarding unapplied 

interest rate increases closely paralleled, 

and would have replaced, current 

comment 20(c)(3)–1. The comment 

would have explained that disclosure of 

foregone interest rate increases would 

apply only to transactions permitting 

interest rate carryover. It further would 

have explained that the amount of the 

foregone interest rate increase was the 

amount that, subject to rate caps, could 

be added to future interest rate 

adjustments to increase, or offset 

decreases in, the rate determined 

according to the index or formula. 

The Bureau reported that the 

consumers tested had difficulty 

understanding the concept of interest 

rate carryover when it was introduced 

during the third round of testing. The 

Bureau attributed this difficulty to the 

simultaneous introduction of other 

complex notions, such as interest-only 

or negatively-amortizing features and 

the allocation of interest, principal, and 

escrow payments for such loans. 

However, the Bureau also simplified the 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10931 

77Macro Report, at viii–ix. ‘‘If not for this rate 

limit, your estimated rate on [date] would be [x]% 

higher’’ was replaced with ‘‘We did not include an 

additional [x]% interest rate increase to your new 

rate because a rate limit applied.’’ 

explanation of carryover interest to 

address this possible confusion.77

In its proposed rule, the Bureau 

recognized that the disclosure of rate 

limits and unapplied carryover interest 

would have provided information that 

might help consumers better understand 

their ARMs. However, the Bureau stated 

that it was considering whether the 

assistance this information would have 

provided outweighed its potential 

distraction from other more key 

information. Also, as explained above, 

consumers had difficulty understanding 

the concept of carryover interest and the 

Bureau was concerned that this 

difficulty might diminish the 

effectiveness of its proposed 

§ 1026.20(c) disclosures. The Bureau 

solicited comments on whether to 

include rate limits and unapplied 

carryover interest in the proposed 

§ 1026.20(c) disclosures. 

The Bureau received few comments 

regarding the proposed disclosure of 

rate limits and unapplied carryover 

interest. A credit union supported 

inclusion of the rate and payment limits 

in the § 1026.20(c) notice and a large 

bank servicer and a large non-bank 

servicer recommended against it. A 

large bank servicer commented that 

consumers do not need this information 

because they receive it at consummation 

and including it in the § 1026.20(c) 

notice would distract and confuse them. 

The non-bank servicer and a trade 

association said the unapplied carryover 

interest was unrelated to the interest 

rate adjustment and would confuse 

consumers. See the section-by-section 

analysis of § 1026.20(c)(2)(iii) above for 

a discussion of disclosure of applying 

previously foregone carryover interest. 

In addition, a credit union and a State 

trade association recommended the 

Bureau eliminate disclosure of carryover 

interest altogether, asserting that it is too 

complex and unnecessary for consumers 

to understand and it would distract 

consumers from other information 

contained in the § 1026.20(c) notices. A 

large servicer suggested the alternative 

of including this information in the 

periodic statement instead of in the 

§ 1026.20(c) notice. 

Because most ARMs covered by this 

rule will adjust a year or more after 

consummation, the Bureau disagrees 

that information provided at 

consummation suffices to adequately 

inform consumers about carryover 

interest and rate limits. Moreover, 

carryover interest is an essential 

element in the determination of the new 

interest rate and payment. For these 

reasons and the reasons in the Bureau’s 

proposed rule, the Bureau is adopting 

the final rule as proposed. The Bureau 

also is adopting proposed comment 

20(c)(2)(iv)–1, with slight modifications 

to clarify the definition of carryover 

interest. 

20(c)(2)(v) 

Explanation of How the New Payment Is 

Determined 

Proposed § 1026.20(c)(2)(v) would 

have required ARM disclosures to 

explain how the new payment was 

determined, including (A) the index or 

formula, (B) any adjustment to the index 

or formula, such as by addition of the 

margin or application of previously 

foregone interest, (C) the loan balance, 

and (D) the length of the remaining loan 

term. This explanation would have been 

consistent with the disclosures provided 

at the time of application pursuant to 

§ 1026.19(b)(2)(iii). The Bureau also 

stated that it would have been 

consistent with the requirement in TILA 

section 128A to disclose the 

assumptions upon which the new 

payment is based, which the Bureau had 

proposed to implement in § 1026.20(d), 

and thus would have promoted 

consistency among Regulation Z ARM 

disclosures. 

The current rule requires disclosure of 

the contractual effects of the adjustment. 

This includes the payment due after the 

adjustment is made and whether the 

payment has been adjusted. The 

proposed rule would have required 

disclosure of this information as well as 

the name of the index and any specific 

adjustment to the index, such as the 

addition of a margin or an adjustment 

due to carryover interest. Proposed 

comment 20(c)(2)(v)(B)–1 explained that 

a disclosure regarding the application of 

previously foregone interest would have 

been required only for transactions that 

permitted interest rate carryover. The 

proposed comment further explained 

that foregone interest was any 

percentage added or carried over to the 

interest rate because a rate cap 

prevented the increase at an earlier 

adjustment. As discussed above, the 

Bureau stated that it believed that this 

explanation would have helped 

consumers better understand how the 

index or formula and margin would 

determine their new payment and 

would have dispelled the notion held by 

many consumers in the initial rounds of 

testing that the creditor subjectively 

determined their new interest rate, and 

thus the new payment, at each 

adjustment. 

The proposal would have required 

disclosure of both the loan balance and 

the remaining loan term expected on the 

date of the interest rate adjustment. The 

current rule requires disclosure of the 

loan balance but not the remaining loan 

term. The date of the balance differed 

slightly in proposed § 1026.20(c) from 

the current rule. Current comment 

20(c)(4)–1 explains that the balance 

disclosed is the one that serves as the 

basis for calculating the new adjusted 

payment while the Bureau proposed 

disclosure of a more current balance, 

i.e., the one expected on the date of the 

adjustment. Both the proposed rule and 

the current rule, as explained in current 

comment 20(c)(4)-1, provide for 

disclosure of any change in the term of 

the loan caused by the adjustment. 

The Bureau stated that disclosure of 

the four key assumptions upon which 

the new payment would be based would 

have provided a succinct overview of 

how the interest rate adjustment works. 

It also would have demonstrated that 

factors other than the index could 

increase consumers’ interest rates and 

payments. Disclosures of these factors, 

the Bureau said, would have provided 

consumers with a snapshot of the 

current status of their adjustable-rate 

mortgages and with basic information to 

help them make decisions about 

keeping their current loan or shopping 

for alternatives. 

Current comment 20(c)(4)–1 clarifies 

that disclosure of certain information 

related to loans that are not fully 

amortizing is required. The Bureau 

proposed disclosure of similar 

information in § 1026.20(c)(2)(vi), 

discussed below. 

Two commenters voiced concern over 

having to project an estimate of the loan 

balance, as required in the proposed 

rule. For a discussion of the use of 

projections of scheduled payments for 

interest-only and negatively-amortizing 

ARMs, as well as for the loan balance, 

see the section-by-section analysis of 

§ 1026.20(c)(2)(ii) above. The Bureau 

did not receive any other specific 

comments regarding § 1026.20(c)(2)(v) 

apart from one community bank 

recommending against the inclusion of 

similar information in both the 

explanation of how the interest rate is 

calculated and the explanation of how 

the new payment is determined. The 

Bureau points out that the components 

of the interest rate calculation are also 

components of how the new payment is 

determined and therefore, the Bureau 

will retain these common components 

in § 1026.20(c)(2)(v). However, to avoid 

redundancy, the final rule does not 

require reiteration of the amount of the 

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10932 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

margin, applied carryover interest, or 

any other adjustment to the index. 

For these reasons and the reasons 

articulated in the proposed rule, the 

Bureau is issuing § 1026.20(c)(2)(v) and 

comment 20(c)(2)(v)(B)–1 as proposed, 

except the final rule does not require 

disclosure of the specific amount of any 

adjustment to the margin, because that 

data is provided in the final rule under 

§ 1026.20(c)(2)(iii). 

20(c)(2)(vi) 

Interest-Only and NegativeAmortization Statement and Payment 

Proposed § 1026.20(c)(2)(vi) would 

have required § 1026.20(c) notices to 

include a statement regarding the 

allocation of payments to principal and 

interest for interest-only or negativelyamortizing ARMs. If negative 

amortization occurred as a result of the 

interest rate adjustment, the proposed 

rule would have required disclosure of 

the payment necessary to amortize fully 

such loans at the new interest rate over 

the remainder of the loan term. As the 

Bureau explained in proposed comment 

20(c)(2)(vi)–1, for interest-only loans, 

the statement would have informed the 

consumer that the new payment would 

cover all of the interest but none of the 

principal owed and, therefore, would 

not reduce the loan balance. For 

negatively-amortizing ARMs, the 

statement would have informed the 

consumer that the new payment would 

cover only part of the interest and none 

of the principal, and therefore the 

unpaid interest would add to the 

balance. The current rule, clarified by 

current comment 20(c)(5)–1, requires 

disclosure of the payment necessary to 

amortize fully loans that become 

negatively-amortizing as a result of the 

adjustment but does not require the 

statement regarding amortization. 

Proposed § 1026.20(c)(2)(vi) and 

proposed comments 20(c)(2)(vi)–1 and 

20(c)(2)(vi)–2 would have replaced the 

current rule and current comment 

20(c)(5)–1. 

Both current § 1026.20(c) and the 

Board’s 2009 Closed-End Proposal to 

revise § 1026.20(c) include, for ARMs 

that become negatively amortizing as a 

result of the interest rate adjustment, 

disclosure of the payment necessary to 

amortize fully those loans at the new 

interest rate over the remainder of the 

loan term. However, the Bureau pointed 

to countervailing considerations 

regarding whether to include this 

information in proposed § 1026.20(c). 

The Bureau recognized that certain 

Dodd-Frank Act amendments to TILA 

pose restrictions on the origination of 

non-amortizing and negativelyamortizing loans. For example, TILA 

section 129C requires creditors to make 

a reasonable and good faith 

determination that consumers have the 

ability to repay the mortgage loan before 

lending to them, and that in making 

such a determination the creditor 

generally must assess the consumer’s 

ability to repay based upon a fullyamortizing payment. The Bureau 

thought it possible that this law and its 

implementing regulations would restrict 

the origination of risky mortgages such 

as interest-only and negativelyamortizing ARMs. The Bureau also 

noted that other Dodd-Frank Act 

amendments to TILA, such as TILA 

section 128(f), which, as implemented 

by proposed § 1026.41, would have 

included information about nonamortizing and negatively-amortizing 

loans in each billing cycle, such as an 

allocation of payments. 

Thus, consumers with interest-only 

and negatively-amortizing ARMs, or 

those who may obtain such loans in the 

future, would receive certain 

information about the interest-only or 

negatively-amortizing features of their 

loans in another disclosure, although 

this would not include the payment 

required to amortize fully negativelyamortizing loans. Testing of the table 

showing the payment allocation of 

interest-only and negatively-amortizing 

ARMs indicated that consumers were 

confused by the concept of 

amortization. Thus, the Bureau said it 

would weigh the value of disclosing 

specific information regarding 

amortization, such as the payment 

needed to amortize fully negativelyamortizing ARMs against possible 

confusion to consumers. In view of 

these changes to the law and the 

outcome of consumer testing, the 

Bureau solicited comments on whether 

to include the payment required to 

amortize ARMs that would become 

negatively amortizing as a result of an 

interest rate adjustment. 

Some industry commenters said that 

the statements regarding interest-only 

and negatively-amortizing ARMs should 

be disclosed instead of the proposed 

allocation information for these loans. 

See section-by-section analysis of 

§ 1026.20(c)(2)(ii). Several consumer 

groups commended the Bureau for 

requiring the amortization statements 

but recommended additional warning 

language for negatively-amortizing 

ARMs, which they characterized as 

dangerous. The Bureau believes that the 

statements regarding amortization are 

clear and succinct and that additional 

warning language is not needed. 

Moreover, the Bureau points out that 

other new mortgage rules more directly 

address the risks posed by nonamortizing mortgage products. 

The Bureau is modifying the wording 

of § 1026.20(c)(2)(vi) and comment 

20(c)(2)(vi)–1 to clarify that § 1026.20(c) 

notices for ‘‘interest-only ARMs’’ as well 

as any other ARMs for which consumers 

are paying only interest, must include 

the statement discussed above regarding 

the amortization consequences of such 

payments. The Bureau also is modifying 

the language of § 1026.20(c)(2)(vi) to 

conform with the proposed language in 

comment 20(c)(2)(vi)–1 and the sectionby-section analysis of the proposed rule 

regarding the amortization statements 

required for ARMs for which consumers 

pay only interest and for negativelyamortizing ARMs. The final rule 

requires § 1026.20(c) notices to disclose, 

for consumers whose ARM payments 

consist of only interest, that their 

payment will not be allocated to pay 

loan principal and will not reduce the 

loan balance or, for negativelyamortizing ARMs, that the new payment 

will not be allocated to pay loan 

principal and will pay only part of the 

interest, thereby adding to the balance 

of the loan. No comments were received 

regarding the § 1026.20(c)(2)(vi) 

requirement to disclose the amount 

necessary to amortize negativelyamortizing ARMs. For these reasons and 

those stated in the proposed rule, the 

Bureau is adopting the rule and 

comments 20(c)(2)(vi)–1 and –2 with the 

addition of the amortization language 

discussed above. 

20(c)(2)(vii) 

Prepayment Penalty 

Proposed § 1026.20(c)(2)(vii) would 

have required disclosure of the 

circumstances under which any 

prepayment penalty could be imposed, 

such as selling or refinancing the 

principal dwelling, the time period 

during which such penalty could apply, 

and the maximum dollar amount of the 

penalty. The proposed rule would have 

cross-referenced the definition of 

prepayment penalty in 

§ 1026.41(d)(7)(iv), the proposed 

periodic statements. 

The Bureau reasoned that interest rate 

adjustments might cause payment shock 

or require consumers to pay their 

mortgage at a rate they might no longer 

be able to afford, prompting them to 

consider alternatives such as 

refinancing. To fully understand the 

implications of such actions, the Bureau 

stated that consumers should know 

whether prepayment penalties might 

apply. Under the proposed rule, such 

information would have included the 

maximum penalty in dollars that might 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10933 

78Macro Report, at vi. 

79See § 1026.32(b)(6)(i). NB: Certain provisions of 

the ATR definition apply specifically to FHA loans. 

apply and the time period during which 

the penalty might be imposed. The 

Bureau stated that the dollar amount of 

the penalty, as opposed to a percentage, 

would be more meaningful to 

consumers. 

The Bureau also proposed disclosure 

of any prepayment penalty in 

§ 1026.20(d) ARM initial rate 

adjustment notices and in the periodic 

statements in proposed § 1026.41. 

Consumer testing of the periodic 

statement included a scenario in which 

a prepayment penalty applied. Most 

participants understood that a 

prepayment penalty applied if they paid 

off the balance of their loan early, but 

some participants were unclear whether 

it applied to the sale of the home, 

refinancing, or other alternative actions 

consumers could pursue in lieu of 

maintaining their adjustable-rate 

mortgages.78 For this reason, the Bureau 

proposed to clarify the circumstances 

giving rise to a prepayment penalty 

which creditors, assignees, and servicers 

must disclose to the consumer in the 

payment change notice. The proposed 

forms included model language to alert 

consumers that a prepayment penalty 

might apply if they pay off their loan, 

refinance, or sell their home before the 

stated date. 

The Bureau recognized that DoddFrank Act amendments to TILA, such as 

TILA section 129C and its implementing 

regulations, would significantly restrict 

a lender’s ability to impose prepayment 

penalties. Other Dodd-Frank Act 

amendments to TILA, such as TILA 

section 128(f) and its implementing 

regulations, would have provided 

consumers with information about 

prepayment penalties in the periodic 

statement they receive each billing 

cycle. Thus, consumers who have ARMs 

with prepayment penalty provisions or 

who might obtain such loans in the 

future would generally receive 

information about them at frequent 

intervals in another disclosure. In view 

of these changes to the law, the Bureau 

solicited comments on whether to 

include information regarding 

prepayment penalties in § 1026.20(c). 

A national trade association, a State 

trade association, a credit union, a large 

servicer, and a non-bank servicer 

recommended against inclusion of the 

prepayment penalty information. The 

primary reasons for their opposition was 

the onerousness of calculating the 

prepayment penalty and the burden of 

having dynamic information fields that 

would require calculating the 

prepayment penalty amount for each 

individual loan requiring a § 1026.20(c) 

notice. These commenters 

recommended use of more standardized 

static language in place of the dynamic 

fields. These commenters stated 

variously that the amount of a 

prepayment penalty is determined by a 

number of dynamic factors and there are 

variations on how to calculate it, 

servicers do not currently include 

prepayment penalty information on the 

file they send to their print vendors 

because many servicing systems are 

unable to calculate and store this 

information as it may be stored in a 

separate system, and this information 

may be computed by hand. The nonbank servicer pointed out that 

prepayment penalties are vanishing as a 

result of market forces and new 

regulations. It recommended listing the 

minimum finance charges as an 

example and disclosing the dollar 

amount of the prepayment penalty on 

the periodic statement instead of on 

ARM disclosures. 

The Bureau is adopting the rule, with 

significant modification from the 

proposed rule. In the final rule, in place 

of requiring disclosure of the maximum 

dollar amount of the penalty, the 

consumer is directed by the required 

disclosure to contact the servicer for 

additional information, including the 

maximum amount of the prepayment 

penalty. Comment 20(c)(2)(vii)–1 

clarifies that the creditor, assignee, or 

servicer has the option of either deleting 

this field entirely from the § 1026.20(c) 

disclosure for consumers who do not 

have prepayment penalties or retaining 

the field and inserting a word such as 

‘‘None’’ after the prepayment penalty 

heading. Thus, the final rule retains 

information crucial for consumers to 

make decisions regarding whether or 

not to retain their ARMs in the face of 

an interest rate and payment increase 

while reducing the burden on industry 

by eliminating a field that was both 

dynamic and particularly difficult to 

calculate. The Bureau believes that 

encouraging consumers to contact the 

servicer for the exact dollar amount of 

the maximum penalty or for other 

questions, rather than including that 

information in the disclosure, does not 

significantly compromise consumer 

protection because contacting the 

servicer should yield the most up-todate information as well as encourage 

contact with the servicer for consumers 

facing financial distress. The Bureau 

also notes that the periodic statement 

required by the final rule likewise does 

not contain specific information about 

any prepayment penalty other than its 

existence, if applicable. The Bureau also 

is changing the cross-reference for the 

definition of prepayment penalty from 

the periodic statement regulation to the 

definition set forth in the ATR rule.79

The Bureau believes, for the reasons 

stated above and in the proposed rule, 

that information about the prepayment 

penalty is important for consumers to 

take into account when considering 

alternatives to an interest rate and 

payment increase. For this reason, the 

Bureau is adopting the final rule and 

comment 20(c)(2)(vii)–1 with the 

modifications set forth above. 

20(c)(3) Format 

Payment Change Rate Adjustment 

Disclosures 

See the section-by-section analysis of 

§ 1026.17(a)(1) above for a discussion of 

the form requirements governing 

§ 1026.20(c). The Bureau received no 

comments regarding its proposed 

changes to § 1026.17(a)(1) regarding 

form requirements governing 

§ 1026.20(c). 

A consumer group representing a 

constituency that speaks more than 100 

different dialects recommended that the 

Bureau require that ARM disclosures be 

provided in languages other than 

English to ensure comprehension by 

mortgagors with limited English 

proficiency. To this end, the commenter 

suggested requiring creditors, assignees, 

and servicers to send a simple, 

multilingual notice each month for the 

first three months of the ARM loan 

asking consumers to indicate their 

preferred language. 

While recognizing the value to 

consumers of limited English 

proficiency of receiving 

communications in their native 

language, the Bureau is issuing the final 

rule without this language requirement 

because the Bureau believes it would be 

difficult and costly to implement, 

particularly considering the number of 

languages in which creditors, assignees, 

and servicers would be required to 

provide § 1026.20(c) and (d) ARM 

notices. The Bureau notes that 

Regulation Z contemplates the use of 

languages other than English in 

§ 1026.27. Under this provision, 

disclosures may be in a language other 

than English, provided that the 

disclosures are made available in 

English at the consumer’s request. Thus, 

a creditor, assignee, or servicer may 

provide ARM disclosures in languages 

other than English, but the Bureau 

declines revising Regulation Z to require 

that they do so. 

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10934 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

80Macro Report, at viii. 

81Macro Report, at viii–ix. 

20(c)(3)(i) 

All Disclosures in Tabular Form 

Proposed § 1026.20(c)(3)(i) would 

have required that the § 1026.20(c) ARM 

adjustment disclosures be provided in 

the form of a table and in the same order 

as, and with headings and format 

substantially similar to, Forms H– 

4(D)(1) and (2) in appendix H to subpart 

C for interest rate adjustments resulting 

in a corresponding payment change. 

The Bureau stated that the proposed 

ARM adjustment notice contains 

complex concepts challenging for 

consumers to understand. For example, 

consumer testing revealed that 

participants generally had difficulty 

understanding the relationship among 

index, margin, and interest rate.80 They 

also had difficulty with the concepts of 

amortization and interest rate 

carryover.81 As a starting point, the 

Bureau looked at the model forms 

developed by the Board for its 2009 

Closed-End Proposal to amend 

§ 1026.20(c). The Bureau then 

conducted its own consumer testing. 

The proposal explained that the 

Bureau’s testing showed that the 

consumers tested more readily 

understood these concepts when the 

information was presented to them in a 

simple manner and in the groupings 

contained in the model forms. The 

Bureau also observed that the 

participants more readily understood 

the concepts when they were presented 

in a logical order, with one concept 

presented as a foundation to 

understanding other concepts. For 

example, the form begins by informing 

consumers of the purpose of the notice: 

that their interest rate is going to adjust, 

when it will adjust, and that the 

adjustment will change their mortgage 

payment. This introduction is 

immediately followed by a table 

visually showing consumers’ current 

and new interest rates. In another 

example, the proposed notice informs 

consumers about their index rate and 

margin before explaining how the new 

payment is calculated based on those 

factors, as well as other factors such as 

the loan balance and remaining loan 

term. 

Based on its consumer testing, the 

Bureau stated that it believed 

understanding of participants was 

enhanced by presenting the information 

in this simple manner, grouped together 

by concept, and in a specific order that 

allows consumers the opportunity to 

build upon knowledge gained. For these 

reasons, the Bureau proposed that 

creditors, assignees, and servicers 

disclose the information required by 

§ 1026.20(c) with headings, content, and 

format substantially similar to Forms H– 

4(D)(1) and (2) in appendix H to this 

part. 

Over the course of consumer testing, 

the Bureau stated, participant 

comprehension improved with each 

successive iteration of the model form. 

As a result, the Bureau believes that 

displaying the information in tabular 

form can focus consumer attention and 

foster greater understanding. Similarly, 

the Bureau found that the particular 

content and order of the information, as 

well as the specific headings and format 

used, presented the information in a 

way that the consumers tested both 

could understand and from which they 

could benefit. 

Although few industry commenters 

recommended specific changes to the 

order, headings, and format of the ARM 

model and sample forms, a large bank 

and a national trade association 

recommended that parties subject to the 

rule be permitted flexibility to account 

for loan products and customer 

situations not specifically addressed by 

the proposed rule and forms. These two 

commenters pointed to certain 

situations, including the following, as 

examples of circumstances in which 

flexibility to customize the forms would 

ensure accurate and full disclosure to 

the consumer: consumer bankruptcies 

and loans originated under certain State 

laws shielding consumers from personal 

liability; loans no longer having interest 

rate adjustments, such as ARMs 

converting to fixed-rate mortgages; 

creditors, assignees, and servicers 

choosing to send the annual § 1026.20(c) 

interest rate disclosure no longer 

required by the final rule; and paymentoption and payment-rate ARMs. The 

national trade association stated that the 

proposed rule established rigid tables, 

configurations, substantive 

requirements, and order of presentation 

dictating the use of the sample and 

model forms in violation of TILA 

section 105(b) which, it said, 

specifically prohibits the Bureau from 

requiring use of a particular form. One 

commenter, a financial services 

compliance and risk management 

company, interpreted the proposed rule 

as mandating certain formatting 

requirements such as a reverse text data 

field and two-sided printing. 

The Bureau’s response to these 

comments is two-fold. First, the 

proposed rule’s requirement that 

§ 1026.20(c) disclosures be provided to 

consumers ‘‘in the form of the table and 

in the same order as, and with headings 

and format substantially similar to’’ the 

proposed model forms is consistent 

with established standards found 

throughout Regulation Z requiring 

tabular formatting as well as other 

conventions. For example, 

§ 1026.6(b)(1), entitled ‘‘Form of 

disclosures; tabular format for open-end 

(not home-secured) plans,’’ requires 

creditors to provide account-opening 

disclosures ‘‘in the form of a table with 

headings, content, and format 

substantially similar to’’ the tables in a 

particular model form. Moreover, 

Regulation Z’s Appendices G and H— 

Open-End and Closed-End Model Forms 

and Clauses sets forth the permissible 

changes to model forms, including the 

§ 1026.20(c) model forms. Thus, the 

proposed rule does not depart from 

established Regulation Z standards and 

does not violate TILA. 

Second, the proposed language 

referred to by commenters was not 

intended to strait-jacket creditors, 

assignees, and servicers into language 

inapplicable to non-standard customer 

situations and loan products. The 

‘‘substantially similar’’ language was 

intended to allow disclosure providers 

the flexibility to develop, for example, 

forms that may be either one- or twosided and that may, but need not, 

feature reverse text data fields. 

For these reasons and those 

articulated in the proposed rule, the 

Bureau is adopting § 1026.20(c)(3)(i) and 

(ii) and comment 20(c)(3)(i)–1. While, as 

stated above, the formatting conventions 

in the final § 1026.20(c) disclosures do 

not depart from standard Regulation Z 

format requirements, the Bureau has 

added comment 20(c)(3)(i)–1 clarifying 

that creditors, assignees, and servicers 

may modify the § 1026.20(c) disclosures 

to account for certain circumstances or 

transactions that may not be addressed 

in the final rule or forms. Also, the final 

rule removes § 1026.20(c) model and 

sample forms from the Regulation Z 

provision prohibiting formatting 

alterations. See Appendices G and H— 

Open-End and Closed-End Model Forms 

and Clauses. 

20(c)(3)(ii) 

Format of Interest Rate and Payment 

Table 

Proposed § 1026.20(c)(3)(ii) would 

have required tabular format for ARM 

payment change notices for, among 

other things, interest rates, payments, 

and the allocation of payments for loans 

that are interest-only and negativelyamortizing. This table would have been 

located within the table proposed by 

§ 1026.20(c)(3)(i). This table would have 

been substantially similar to the one 

tested by the Board for its 2009 Closedmstockstill on DSK4VPTVN1PROD with RULES3

Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10935 

82Macro Report, at vii. 

83 74 FR 43232, 43272 (Aug. 26, 2009). 

84Regulation Z was previously implemented by 

the Board at 12 CFR 226. In light of the general 

transfer of the Board’s rulemaking authority for 

TILA to the Bureau, the Bureau adopted an interim 

final rule recodifying the Board’s Regulation Z at 12 

CFR 1026. 

85 74 FR 43232, 43273 (citing 52 FR 48665, 48671 

(Dec. 24, 1987)). 

End Proposal to revise § 1026.20(c). The 

Bureau’s proposal would have required 

the table to follow the same order as, 

and have headings and format 

substantially similar to, Forms H– 

4(D)(1) and (2) in appendix H of subpart 

C. 

Disclosing the current interest rate 

and payment in the same table allows 

consumers to readily compare them 

with the adjusted rate and new 

payment. Consumer testing revealed 

that nearly all participants were readily 

able to identify the table and understand 

the table and its content.82 The new 

interest rate and payment and date the 

first new payment is due is key 

information the consumer must know to 

commence payment at the new rate. For 

these reasons, the Bureau proposed 

locating this information prominently in 

the disclosure. 

The Bureau is issuing the final rule as 

proposed in § 1026.20(c)(3)(ii). See the 

section-by-section analysis of 

§ 1026.20(c)(3)(ii) for a discussion of 

comments received and the Bureau’s 

rationale for the proposed format in the 

interest rate and payment table and 

changes made in the final rule. 

20(d) Initial Rate Adjustment 

Elimination of Current § 1026.20(d) 

Current § 1026.20(d) permits creditors 

to substitute information provided in 

accordance with variable-rate 

subsequent disclosure regulations of 

other Federal agencies for the 

disclosures required by § 1026.20(c). In 

its 2009 Closed-End Proposal, the Board 

proposed amending the regulation that 

is now § 1026.20, including deleting this 

provision regarding substitution. The 

Board stated that, as of August 2009, 

there were ‘‘[n]o comprehensive 

disclosure requirements for variable-rate 

mortgage transactions * * * in effect 

under the regulations of the other 

Federal financial institution supervisory 

agencies.’’ 83 The Board explained that 

when it originally adopted the provision 

in 1987, as footnote 45c of § 226.20(c) of 

Regulation Z,84 the regulations of other 

financial institution supervisory 

agencies—namely the OCC, the Federal 

Home Loan Bank Board (the FHLBB), 

and HUD—required subsequent 

disclosures for ARMs.85

The Bureau proposed removing the 

current content of § 1026.20(d) because 

it was not aware of any other Federal 

financial institution supervisory agency 

rules requiring comprehensive 

disclosure requirements for ARMs. The 

Bureau solicited comments on whether 

there was any reason to retain this 

provision, including whether the 

removal had implications for rights 

under the Alternative Mortgage 

Transaction Parity Act. 

One non-bank servicer said that it 

opposed the elimination of the current 

content of § 1026.20(d), but did not offer 

a reason why. Based on the lack of 

reasoned opposition to the Bureau’s 

proposal and the above-stated rationale, 

the Bureau is adopting the proposal, 

thereby removing this text from the final 

rule. 

Legal Authority 

For the reasons adduced above in the 

discussion of the legal authority 

underlying the Bureau’s implementation 

of § 1026.20(c), the Bureau removes 

current § 1026.20(d) pursuant to its 

authority under TILA sections 105(a) 

and Dodd-Frank Act section 1405(b). 

New Initial ARM Interest Rate 

Adjustment Disclosures 

In place of current § 1026.20(d), the 

Bureau proposed to implement the 

initial ARM adjustment notice 

mandated by TILA section 128A, as 

added by Dodd-Frank Act section 1418. 

Under proposed § 1026.20(d), 

approximately six months before the 

initial adjustment of adjustable-rate 

mortgages, creditors, assignees, and 

servicers would have been required to 

provide consumers with key 

information about their ARM 

adjustment. The information disclosed 

would have included the new rate, the 

new payment, and options for pursuing 

alternatives to their ARM. This initial 

ARM adjustment notice would have 

harmonized with proposed revisions to 

the § 1026.20(c) ARM payment change 

notice. The Bureau stated its belief that 

promoting consistency between the 

ARM disclosure provisions of 

§ 1026.20(c) and (d) would have 

reduced compliance burdens on 

industry and minimized consumer 

confusion. 

Creditors, assignees, and servicers. 

Proposed § 1026.20(d) would have 

applied to creditors, assignees, and 

servicers. Proposed comment 20(d)–1 

clarified that a creditor, assignee, or 

servicer that no longer owned the 

mortgage loan or the mortgage servicing 

rights would not have been subject to 

the requirements of § 1026.20(d). This 

language tracked, in part, the 

requirements of TILA section 128A that 

creditors and servicers must provide the 

initial ARM interest rate adjustment 

notices, but added assignees to the list 

of covered persons. The Bureau stated 

that applying the rule to creditors, but 

not assignees, would have resulted in 

inconsistent levels of consumer 

protection and differing obligations for 

similarly-situated owners of mortgage 

loans. 

The Bureau reasoned that it is a 

common practice for creditors to sell 

many or all of the loans they originate 

rather than hold them in portfolio. In 

those cases, without adding assignees as 

covered persons, assignees’ obligation to 

provide consumers with the 

§ 1026.20(d) notice would be unclear. 

Thus, the Bureau reasoned, imposing 

requirements only on creditors or 

servicers might have particularly 

deleterious effects on consumers whose 

creditors assign their mortgage loans. 

The Bureau reasoned that the 

protections afforded under proposed 

§ 1026.20(d) should not be determined 

by the happenstance of loan ownership 

or favor one sector of the mortgage 

market over another. For these reasons, 

the Bureau proposed to make assignees, 

along with creditors and servicers, 

subject to the requirements § 1026.20(d). 

For the same reasons, proposed 

§ 1026.20(d) would have required, as 

clarified by comment 20(d)–1 that any 

provision of subpart C governing 

§ 1026.20(d) also would have applied to 

creditors, assignees, and servicers—even 

where the other provisions of subpart C 

referred only to creditors. 

The Bureau received no comments 

specifically on the proposed inclusion 

of assignees as parties covered under 

§ 1026.20(d), although two commenters 

stated that servicers, as opposed to 

assignees, are not subject to civil 

liability under TILA. The Bureau points 

out that the proposed rule requires 

creditors, assignees, and servicers to 

provide consumers with the disclosures 

required by § 1026.20(d) without 

referencing creditor, assignee, or 

servicer civil liability. Consistent with 

the proposal, the final rule and 

commentary set forth the obligation of 

creditors, assignees, and servicers but 

do not specifically address the issue of 

civil liability of any covered person in 

an action brought by a consumer. That 

issue is governed by TILA and the 

Bureau’s revisions do not purport to 

impose requirements inconsistent with 

the statute. See the section-by-section 

analysis of § 1026.20(c) above for further 

discussion of civil liability. 

For these reasons, and the reasons 

articulated in the proposal, the Bureau 

is adopting the rule as proposed. The 

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10936 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

Bureau is adopting comment 20(d)–1, 

with added language clarifying that, (1) 

creditors, assignees, and servicers that 

own either the applicable ARM or the 

applicable mortgage servicing rights, or 

both, are subject to the requirements of 

§ 1026.20(d) and (2) although the rule 

applies to creditors, assignees, and 

servicers, those parties may decide 

among themselves which of them will 

provide the required disclosures. 

The extension of the requirement to 

assignees is authorized, among other 

authorities, under TILA section 105(a) 

because, for the reasons discussed 

above, it is necessary and proper to 

effectuate the purposes of TILA, 

including to assure a meaningful 

disclosure of credit terms and protect 

the consumer against unfair credit 

billing practices, and to prevent 

circumvention or evasion of TILA. The 

Bureau also uses its authority under 

Dodd-Frank Act section 1405(b) to 

extend the applicability of the initial 

ARM adjustment notices under TILA 

section 128A to assignees. As discussed 

above, this extension serves the interest 

of consumers and the public interest. 

Application of § 1026.20(d) to assignees 

is consistent with current § 1026.20(c) 

commentary clarifying that those 

disclosure requirements apply to 

subsequent holders. Subjecting 

creditors, assignees, and servicers to the 

requirements of § 1026.20(d) also 

promotes consistency with final 

§ 1026.20(c) and § 1026.41 (the periodic 

statement), which likewise apply to 

creditors, assignees, and servicers. 

Loan modifications. A large bank and 

a national trade association 

recommended that the Bureau exempt 

loan modifications for financiallydistressed consumers from the 

requirements of § 1026.20(d). They said 

that, among other reasons, requiring the 

notices in the context of a loan 

modification would delay execution of 

the loan modification by the 210 to 240 

days advance notice required under the 

rule and that the § 1026.20(d) notice was 

not appropriate for loan modifications. 

The Bureau notes that § 1026.20(c), 

the existing Regulation Z rule regarding 

post-consummation ARM disclosures, 

does not exempt loan modifications 

from its requirements. However, the 

Bureau agrees with this 

recommendation, and therefore, 

§ 1026.20(d) limits coverage to initial 

interest rate adjustments pursuant to the 

ARM contract. Because initial interest 

rate adjustments occurring pursuant to a 

loan modification do not occur pursuant 

to the ARM contract, they will not be 

subject to this rule and thus, will not 

delay execution of loan modification 

agreements. See comment 20(d)–2, 

which the Bureau is adopting in the 

final rule. The Bureau believes that an 

initial interest rate adjustment pursuant 

to a loan modification agreement in a 

loss mitigation context does not require 

the consumer protections contemplated 

by § 1026.20(d). Such consumers have 

either agreed to the new interest rate 

prior to execution of the loan 

modification or are receiving the benefit 

of a lower rate and thus, are not at risk 

of payment shock. Because the loan 

modification is the actual result of 

pursuing alternatives to the payments 

otherwise required under their 

adjustable-rate mortgages, the advance 

notice afforded by the rule does not 

benefit such consumers. 

For these reasons, as adopted, 

§ 1026.20(d) exempts from its coverage 

interest rate changes occurring in the 

context of a loan modification executed 

as a loss mitigation measure. Comment 

20(d)–2 clarifies, however, that the 

requirements of § 1026.20(d) do apply to 

the initial interest rate adjustment that 

occurs subsequent to the execution of a 

loan modification agreement, if the 

interest rate adjustment occurs pursuant 

to the ARM contract as modified. 

Form of delivery. Proposed 

§ 1026.20(d) would have required that 

the initial ARM interest rate adjustment 

notices be provided to consumers in 

writing, separate and distinct from all 

other correspondence. Proposed 

comment 20(d)–2 explained that to 

satisfy this requirement, the notices 

would have had to be mailed or 

delivered separately from any other 

material. The proposed comment said 

that, in the case of mailing the 

disclosure, no material in the envelope 

other than the ARM notice would have 

been permitted. If provided 

electronically, the notice would have 

had to be the only content or attachment 

in the email. This proposed form of 

delivery would have contrasted with the 

Bureau’s proposal for § 1026.20(c), 

which was subject to the less stringent 

segregation requirements of 

§ 1026.17(a)(1), as it would have been 

amended by the Bureau’s proposal. The 

proposed comment further explained 

that the notice proposed by § 1026.20(d) 

would have been allowed to be 

provided to consumers in electronic 

form with consumer consent, pursuant 

to the requirements of § 1026.17(a)(1). 

However, in recognition of the 

ambiguity of the statutory language of 

TILA section 128A(b), the Bureau 

solicited comments on whether 

consumer protection would be 

compromised by providing § 1026.20(d) 

notices as a separate document but in 

the same envelope or email 

correspondence with other messages 

from the creditor, assignee, or servicer. 

Consumer groups generally 

applauded the Bureau for its proposed 

ARM disclosures and none responded to 

the Bureau’s request for comments on 

this issue of delivery form. One large 

servicer supported the proposed 

interpretation of ‘‘separate and distinct 

from all other correspondence.’’ On the 

other hand, many industry groups 

recommended that the Bureau permit 

inclusion of the ARM notice in the same 

envelope or email with other servicer 

communications. These commenters 

included a large bank, two national 

credit union trade associations, one 

national and one State trade association, 

three credit unions, and a large nonbank servicer. They stated that 

consumers would be more attentive to 

the ARM notice if it accompanied the 

monthly statement consumers were 

used to receiving from the servicer. 

They also noted the higher cost of 

mailing the notice separately. 

The Bureau is mindful of the 

ambiguity of the statutory language. 

‘‘Separate and distinct from all other 

correspondence’’ reasonably can be 

interpreted to require a creditor, 

assignee, or servicer to provide the ARM 

payment change notice (1) as a separate 

document from all other 

correspondence, but in the same 

envelope or email or (2) in an envelope 

or email that does not contain any other 

material. The former interpretation is 

consistent with the form requirements 

of revised § 1026.17(a)(1), as discussed 

above in that section-by-section 

analyses of § 1026.17(a)(1). 

The Bureau does not believe that 

consumer protection would be 

compromised by providing the 

§ 1026.20(d) notice as a separate 

document in the same envelope or email 

with other servicer communications. 

Consumers may be more likely to open 

a monthly periodic statement than a 

stand-alone communication from their 

servicer. Moreover, including the 

§ 1026.20(d) initial adjustment notice as 

a separate document and in the 

particular format required under the 

rule, sets it apart from the other 

materials. The Bureau also recognizes 

that requiring the notice to be sent 

separately would generate real 

incremental costs for industry without 

any clear benefit to consumers. Thus, 

the Bureau is issuing the final rule and 

comment 20(d)–3 with the adoption of 

this interpretation of the statutory 

language. However, § 1026.17(a)(1) 

permits, but does not mandate, that 

disclosures subject to its requirements 

be provided to the consumer as a 

separate document. For this reason, the 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10937 

Bureau revises § 1026.17(a)(1) to require 

that the § 1026.20(d) initial interest rate 

disclosures be provided to consumers as 

a separate document. Thus, in the final 

rule, both § 1026.20(c) and (d) are 

subject to the requirements of 

§ 1026.17(a)(1). 

Timing. The Bureau’s proposal for 

§ 1026.20(d) generally followed the 

statutory requirement in TILA section 

128A to provide consumers with the 

initial interest rate adjustment notice 

during the one-month period that ends 

six months before the interest rate in 

effect during the introductory period 

expires. Thus, the disclosure would 

have had to be provided six to seven 

months before the initial interest rate 

adjustment. The Bureau stated that the 

§ 1026.20(d) disclosures were designed 

to avoid payment shock so as to put 

consumers on notice of upcoming 

adjustments to their adjustable-rate 

mortgages that may have resulted in 

higher payments. (The § 1026.20(c) 

notice, among other things, would have 

provided consumers with the exact 

amount of any payment change caused 

by an adjustment.) The six to seven 

month advance notice would have 

allowed sufficient time for consumers to 

consider their alternatives if the notice 

indicated there could be an increase in 

payment they could not have afforded. 

The proposal suggested refinancing as 

one alternative that consumers might 

consider. As set forth in the proposed 

rule, average timelines to complete a 

refinancing exceed 70 days. 

The Bureau stated that, in the interest 

of consistency within Regulation Z, 

proposed § 1026.20(d) tied its timing 

requirement to the date, expressed in 

days rather than months, the first 

payment at a new level would have 

been due, rather than the date of the 

interest rate adjustment. The Bureau 

proposed this to maintain consistency 

with both current and proposed 

§ 1026.20(c), which express time 

periods in days rather than months. 

Because interest on consumer mortgage 

credit generally is paid one month in 

arrears, for most ARMs, this would have 

added another approximately 30 days to 

the timeframe for delivery of the 

disclosures. Thus, the notices the 

Bureau proposed under § 1026.20(d) 

would have had to be provided to 

consumers seven to eight months in 

advance of payment at the adjusted rate. 

Measured in days, the initial interest 

rate adjustment disclosures would have 

been due at least 210, but not more than 

240, days before the first payment at the 

adjusted level is due. By tying the 

timing of the disclosure to the date 

payment at a new level is due and 

calculating it in days rather than 

months, the Bureau stated that proposed 

§ 1026.20(d) would have been more 

precise, because months can vary in 

length, and would have maintained 

consistency with the timing 

requirements of proposed § 1026.20(c). 

Proposed comment 20(d)–2 explained 

that the timing requirements would 

exclude any grace period. It also 

clarified that the date the first payment 

at the adjusted level would be due is the 

same as the due date of the first 

payment calculated using the adjusted 

interest rate. 

Also, pursuant to TILA section 128A, 

consumers with ARMs adjusting for the 

first time within six months after 

consummation, must receive the 

§ 1026.20(d) initial interest rate 

adjustment notices at consummation. 

The proposed rule tied the timing of this 

requirement to days rather than months 

and to the date the new payment is due 

rather than the date of the adjustment to 

insure both internal consistency and 

consistency with § 1026.20(c). Thus, the 

proposed rule required that consumers 

be provided with the initial interest rate 

adjustment notice at consummation if 

their ARMs would be adjusting for the 

first time within 210 days before the due 

date of the first adjusted payment. 

A national trade association asked the 

Bureau to clarify whether the 

requirements of § 1026.20(d) are 

restricted to ARMs originated after the 

effective date of the final rule or 

whether they apply as well to existing 

ARMs that adjust for the first time after 

the effective date. Neither the proposal 

nor the final rule includes an exception 

or a grandfather period for ARMs 

originated prior to the effective date of 

the rule but which adjust for the first 

time after that date. Therefore, once the 

rule takes effect, it applies to all ARMs 

adjusting for the first time. 

One large bank recommended that the 

§ 1026.20(d) disclosures be provided to 

consumers 120 days, as opposed to at 

least 210 days, before the first payment 

at the adjusted level is due. Several 

commenters recommended limiting the 

notice to ARMs that adjust one, two, or 

more years after origination. As 

discussed above, the Dodd-Frank Act 

mandates the timeframe within which 

the disclosures must be provided to 

consumers, including specifically 

requiring the disclosures for ARMs 

adjusting soon after consummation. The 

Bureau believes the statutorily-required 

timeframe is appropriate to remind 

consumers of the upcoming initial 

interest rate adjustments and, as 

applicable, to potentially stave off 

payment shock and provide consumers 

with the time necessary to effectively 

pursue alternatives to their current 

mortgage. Also, the Bureau notes that, 

for ARMs adjusting within 180 days of 

consummation, providing the notice 

directly to consumers at consummation 

is less of a burden than mailing or 

delivering it at a later date. For the 

reasons set forth above, with regard to 

timing, the Bureau is adopting the final 

rule as proposed. The Bureau is 

adopting comment 20(d)–3, which was 

proposed comment 20(d)–2, with 

modification to clarify that ‘‘provide’’ 

means deliver or place in the mail and 

to clarify that the timeframe excludes 

any courtesy, as well as grace, periods. 

Commenters recommending against 

adoption of proposed § 1026.20(d). A 

large number of industry commenters, 

including many small banks and 

national and State trade associations, 

recommended that the Bureau remove 

entirely the initial ARM interest rate 

notice from the final rule. In the 

alternative, some suggested providing a 

generic reminder warning consumers of 

the upcoming interest rate adjustment. 

Some commenters suggested adding to 

that general warning notice one or more 

of the following: the maximum interest 

rate and payment, an explanation of 

how the interest rate and payment is 

determined, and a statement 

encouraging consumers to direct any 

questions or concerns to their servicer. 

A large bank recommended a generic 

notice emphasizing and reminding 

consumers of the details of the 

adjustable-rate feature and referring 

them to their loan contracts for specific 

information. A credit union 

recommended eliminating the notice 

because, for some ARMs, it would come 

mere months after consummation. A 

few others suggested integrating the 

interest rate information into the 

periodic statement or escrow statement, 

although other commenters opposed 

this. See the discussion below of 

including the ARM interest rate 

adjustment information in the periodic 

statement. A research organization, a 

large bank, a trade association, and a 

credit union stated that postimplementation testing was warranted 

to determine if the Bureau’s contention 

that consumers will be better informed 

as result of receiving the § 1026.20(d) 

disclosures is correct. A non-bank 

servicer recommended that the Bureau 

analyze statements and consumer 

responses post-implementation to 

ensure the relevance of all the 

information required to be provided to 

consumers. 

Many of the commenters 

recommending against the adoption of 

the § 1026.20(d) requirements claimed 

that the cost of the § 1026.20(d) notices 

would outweigh its benefits. They said 

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that reprogramming their origination 

and servicing systems would be 

expensive and time consuming. Small 

banks expressed concern that their 

systems could not accommodate certain 

changes, such as distinguishing between 

initial and subsequent rate adjustments 

and maintaining different timeframes 

for both § 1026.20(c) and (d). Some 

stated that the § 1026.20(d) notice was 

unnecessary because consumers were 

informed at origination about interest 

rate adjustments. They also thought the 

§ 1026.20(c) notice or the periodic 

statement was sufficient to warn 

consumers of upcoming interest rate 

changes. They said that those disclosure 

requirements or other Bureau measures, 

such as the qualified mortgage rule 

implementing TILA section 129C, 

would limit the amount an ARM could 

adjust. Other commenters said that 

providing the notice seven to eight 

months before the new payment is due 

is too early to have an effect on 

consumers. A trade association 

representing credit unions 

recommending combining the 

§ 1026.20(c) and (d) notices and 

providing the unified notice between 

three and four months in advance of the 

initial interest rate adjustment. 

A key concern among commenters 

was the use of estimates in the 

§ 1026.20(d) notice. See immediately 

below, the small servicer discussion, 

regarding these same issues. Use of 

estimates, they predicted, would create 

confusion and lead to increased 

customer inquiries, inaccurate and late 

payments, unnecessary refinancings, 

and strategic defaults. A large bank 

stated that emphasizing that the 

calculation is an estimate risks 

diminishing the effectiveness of the 

notice. The large bank recommended 

the Bureau undertake more testing to 

ensure that the inclusion of estimates in 

§ 1026.20(d) notice does not lead to 

consumer confusion, dissatisfaction, 

and frustration. One credit union said 

that its attempt to provide an estimated 

early warning disclosure resulted in 

customer confusion but a non-bank 

servicer said that its early warning 

notice achieved significant results and 

response rates. Some industry 

commenters also stated that estimates 

would be a poor predictor in a changing 

interest rate environment. A few 

commenters stated that providing 

estimates to consumers would create a 

legal risk, claiming there was no safe 

harbor if the estimates turn out to be 

less than the actual interest rate 

adjustment. Many commenters said that 

that the volume of information, 

especially inclusion of data not required 

by the Dodd-Frank Act and the number 

of dynamic fields required by the notice, 

would unreasonably burden industry 

and overload consumers. 

In enacting TILA section 128A, 

Congress made a deliberate judgment 

that the first time an ARM interest rate 

adjusts poses particular risk to 

consumers, such that consumers need 

significant advance notice of those risks 

in order to be prepared to handle the 

anticipated mortgage payment. The 

Bureau observes that it is not 

uncommon for ARMs to have one 

interest rate for several or more years 

before the first adjustment, after which 

adjustments may occur on an annual 

basis. Thus, the initial interest rate 

adjustment is different in kind for 

consumers than subsequent adjustments 

which consumers are more likely to 

anticipate. The Bureau also notes that 

during the years prior to the financial 

crisis, a significant number of ARMs 

were originated with the underwriting 

predicated only on the initial monthly 

payments. While the Dodd-Frank Act 

ability-to-repay provisions address this 

by requiring that ARMs be underwritten 

based upon the ‘‘fully-indexed rate,’’ 

consumers are still subject to payment 

shock at the first adjustment if interest 

rates have risen since consummation. 

Thus, the Bureau concludes that the 

new initial interest rate disclosure can 

provide significant benefits for 

consumers. For these reasons, the 

Bureau rejects the suggestion that it 

create an exemption that would override 

TILA section 128A in its entirety. 

However, as discussed in the proposal, 

the Bureau has evaluated whether 

individual elements of the § 1026.20(d) 

notice further consumer protection 

compared to their potential burden on 

creditors, assignees, and servicers. In 

light of the comments received and 

further evaluation, the Bureau is 

modifying certain of the proposed 

requirements to alleviate burden, as 

discussed throughout the section-bysection analysis of this final rule. 

With respect to the use of an 

estimated interest rate and payment in 

the § 1026.20(d) notice, the Bureau 

believes providing consumers with 

concrete amounts and an expected reallife scenario could benefit them 

significantly more than a generic 

warning that fails to give consumers an 

idea of what to expect when their 

interest rate adjusts for the first time. 

Consumer testing has underscored the 

participants tested understanding of the 

impact on them of a concrete amount as 

opposed to a generic assumption. 

It is therefore appropriate to include 

estimates in the § 1026.20(d) 

disclosures. TILA section 128A(b)(3) 

explicitly contemplates the use of good 

faith estimates. The language and 

formatting of the § 1026.20(d) model 

forms clearly denote when the new 

payment amount and interest rate are 

estimates, and the disclosure informs 

consumers that the actual amounts will 

be provided to consumers two to four 

months before the date the first new 

payment is due, if the new payment will 

be different from the current payment. 

In light of the comments expressing 

concern about the potential to confuse 

or mislead consumers, the Bureau has 

reviewed the requirements and 

emphasized that those disclosures are 

estimates. Consumer testing confirmed 

that participants understood the use of 

estimates in the model forms. Creditors, 

assignees, and servicers should not 

expect liability resulting from consumer 

confusion as the use of estimates is 

clearly contemplated under the statute 

and regulation. 

In addition, the Bureau believes that 

the goal of achieving greater consumer 

protection is potentially furthered by 

exercising its authority to modify 

certain aspects of the notice required by 

TILA section 128A. For example, the 

final rule does not require dynamic 

fields for contact information for 

specific homeownership counselors and 

counseling organizations and State 

housing finance authorities, as the 

statute mandates. The final rule also 

removes most of the information and all 

dynamic fields from the prepayment 

penalty disclosures. The Bureau also is 

exercising its exception authority to 

exempt from the requirements of 

§ 1026.20(d) consumer ARMs with 

terms of one year or less. Moreover, the 

final rule clarifies the flexibility 

available to creditors, assignees, and 

servicers using the model forms. With 

these changes, and others, the Bureau 

believes that the requirements in 

§ 1026.20(d) can provide protections for 

consumers consistent with the goals of 

TILA section 128A while avoiding 

imposing requirements that may have 

unintended consequences with respect 

to the cost or availability of credit. For 

these reasons, the Bureau is adopting 

the final rule with certain adjustments 

to the proposed § 1026.20(d) ARM 

initial interest rate adjustment notices, 

as set forth below. 

Conversions. Proposed comment 

20(d)–3 explained that, in the case of an 

open-end account converting to a 

closed-end adjustable-rate mortgage, 

§ 1026.20(d) disclosures would not be 

required until the implementation of the 

initial interest rate adjustment postconversion. The Bureau analogized the 

conversion to consummation. Thus, like 

other ARMs subject to the requirements 

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86See § 1026.40(d)(12). 

87See § 1026.6(a)(1)(ii) and (a)(3)(vii). 

88Compare § 1026.17(b) with § 1026.5(b)(1)(i). 

89TILA section 128A. For example, a 3/1 hybrid 

ARM has a three-year introductory period with a 

fixed interest rate, after which the interest rate 

adjusts annually. ARMs that are not hybrid, on the 

other hand, have no period with a fixed rate of 

interest. Such ARMs commence with a rate that 

adjusts at set uniform intervals, such as 3/3 (adjusts 

every three years), 5/5 (adjusts every five years), etc. 

of proposed § 1026.20(d), disclosures for 

these types of converted ARMs would 

not have been required until the first 

interest rate adjustment following the 

conversion. The proposed rule would 

have been consistent with the 

§ 1026.20(c) proposal for open-end 

accounts converting to closed-end 

adjustable-rate mortgages. The Bureau 

did not receive comments on the topic 

of open-end accounts converting to 

closed-end ARMs and is adopting the 

proposed rule and proposed comment 

20(d)–3, renumbered as comment 20(d)– 

4, without change. 

20(d)(1) Coverage 

20(d)(1)(i) In General 

Scope 

Adjustable-rate mortgages defined. 

Proposed § 1026.20(d)(1)(i) defined an 

adjustable-rate mortgage or ARM, for 

purposes of § 1026.20(d), as a closedend consumer credit transaction secured 

by the consumer’s principal dwelling in 

which the annual percentage rate may 

increase after consummation. The 

proposed rule used the wording from 

the definitions of ‘‘adjustable-rate’’ and 

‘‘variable-rate’’ mortgage in subpart C of 

Regulation Z to promote consistency 

within the regulation. Proposed 

comment 20(d)(1)(i)–1 explained that 

the definition of ‘‘ARM’’ meant 

‘‘variable-rate mortgage’’ as that term is 

used elsewhere in subpart C of 

Regulation Z, except as would have 

been provided in proposed comment 

20(d)(1)(ii)–2. Having received no 

comments on this issue, the Bureau is 

adopting the final rule and comment 

20(d)(1)(i)–1 as proposed. 

Proposed comment 20(d)(1)(i)–1 also 

clarified that the requirements of 

§ 1026.20(d)(1)(i) would not be limited 

to transactions financing the initial 

acquisition of the consumer’s principal 

dwelling, but would apply to other 

closed-end ARM transactions secured 

by the consumer’s principal dwelling, 

consistent with current comment 19(b)– 

1 and proposed § 1026.20(c)(1)(i). 

Having received no comments on this 

subject, the Bureau is adopting the final 

rule and comment 20(d)(1)(i)–1 as 

proposed. 

Applicable to closed-end transactions. 

In its proposal, the Bureau stated that it 

believed that TILA section 128A and the 

implementing disclosures in proposed 

1026.20(d) primarily benefited 

consumers with closed-end adjustablerate mortgages. In contrast, the Bureau 

said, open-end credit transactions 

secured by a consumer’s dwelling 

(home equity plans) with adjustable-rate 

features were subject to distinct 

disclosure requirements under TILA 

and subpart B of Regulation Z that 

substitute for the proposed § 1026.20(c) 

and (d) disclosures. Therefore, as 

discussed below, the Bureau proposed 

to use its authority under TILA section 

105(a) and (f) to exempt adjustable-rate 

home equity plans from the 

requirements of TILA section 128A and 

proposed § 1026.20(d). 

The Bureau stated that section 127A 

of TILA and § 1026.40(b) and (d) of 

Regulation Z require the disclosure of 

specific information about home equity 

plans at the time an application is 

provided to the consumer. These 

disclosures include specific information 

about variable- or adjustable-rate plans, 

including, among other things, the fact 

that the plan has a variable- or 

adjustable-rate feature, the index used 

in making adjustments and a source of 

information about the index, an 

explanation of how the index is 

adjusted such as by the addition of a 

margin, and information about 

frequency of and limitations to changes 

to the applicable rate, payment amount, 

and index.86 The required account 

opening disclosures for home equity 

plans also must include information 

about any variable- or adjustable-rate 

features, including the circumstances 

under which rates may increase, 

limitations on the increase, and the 

effect of any increase.87

Thus, the Bureau concluded, 

Regulation Z already contained a 

comprehensive scheme for disclosing to 

consumers the variable- or adjustablerate features of home equity plans. The 

Bureau stated that requiring servicers to 

provide information about the index 

and an explanation of how the interest 

rate and payment would be determined, 

as required by TILA section 128A and 

proposed by § 1026.20(d), in connection 

with home equity plans would have 

been largely duplicative of the current 

disclosure regime and would have been 

confusing and unhelpful for consumers. 

Moreover, the Bureau reasoned, unlike 

closed-end adjustable-rate mortgages, 

consumers with home equity plans 

generally may draw from the adjustablerate feature on the account at any time. 

Thus, providing the good faith estimate 

of the amount of the monthly payment 

that would apply after the interest rate 

adjustment, as required by TILA section 

128A and proposed by § 1026.20(d), 

would not have be useful because the 

estimate would be based on the 

outstanding loan balance at the time the 

notice is given, which would change 

after the notice is given anytime the 

consumer withdraws funds. 

Two other factors also supported the 

Bureau’s use of the TILA section 105(a) 

exception authority to exclude home 

equity plans from the requirements of 

proposed § 1026.20(d). First, use of the 

term ‘‘consummation’’ in TILA section 

128A supported the application of 

proposed § 1026.20(d) only to closedend transactions. Regulation Z generally 

requires disclosures for closed-end 

credit transactions to be provided 

‘‘before consummation of the 

transaction.’’ By contrast, Regulation Z 

generally requires account opening 

disclosures for open-end credit 

transactions to be provided ‘‘before the 

first transaction is made under the 

plan.’’ 88 Because Regulation Z uses the 

term ‘‘consummation’’ in connection 

with closed-end credit transactions, use 

of the word ‘‘consummation’’ in DoddFrank Act section 1418 supported the 

Bureau’s proposed exemption for openend home equity plans from the 

requirements of § 1026.20(d). Second, 

the Bureau stated that Dodd-Frank Act 

section 1418 places TILA section 128A 

adjacent to the similarly numbered 

provision, TILA section 128, which is 

limited to ‘‘Consumer Credit not under 

Open-End Credit Plans.’’ In its proposal, 

the Bureau stated that Congress’s 

placement of the new ARM disclosure 

requirement in a segment of TILA that 

applies only to closed-end credit 

transactions further supported the 

Bureau’s proposal to exempt open-end 

credit transactions, in this case variableor adjustable-rate home equity plans, 

from the requirements of that section. 

The Bureau received no comments on 

this issue. For the reasons discussed in 

the proposal, the Bureau is adopting the 

final rule restricting the scope of 

§ 1026.20(d) to closed-end transactions. 

Savings clause. In the proposed rule, 

the Bureau noted that the statute’s 

provisions applied to hybrid ARMs, 

defined as ‘‘consumer credit 

transaction[s] secured by the consumer’s 

principal residence with a fixed interest 

rate for an introductory period that 

adjusts or resets to a variable interest 

rate after such period.’’ 89 The proposal 

discussed the statute’s ‘‘savings clause,’’ 

permitting the Bureau to require the 

initial interest rate adjustment notices 

set forth in TILA 128A(b) or ‘‘other 

notices’’ for ARMs other than hybrid 

ARMs. The Bureau proposed to use this 

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10940 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

authority generally to extend the 

disclosure requirements of proposed 

§ 1026.20(d) to ARMs that were not 

hybrid. The Bureau stated that it 

believed this approach was necessary 

because both hybrid ARMs and those 

that are not hybrid would subject 

consumers to the same payment shock 

that the advance notice of the first 

interest rate adjustment was designed to 

address. As an example, the Bureau 

pointed out that 3/1 hybrid ARMs, 

where the initial interest rate is fixed for 

three years and then adjusts every year 

after that, and 3/3 ARMs, where the 

interest rate adjusts every three years, 

both adjust for the first time after three 

years and present the same potential 

payment shock to consumers holding 

either loan. The Bureau also pointed out 

that the same was true for 5/1 hybrid 

ARMs and 5/5 ARMs, 7/1 hybrid ARMs 

and 7/7 ARMs, 10/1 hybrid ARMs and 

10/10 ARMs, etc. In sum, conventional 

ARMs and hybrid ARMs can have the 

same initial periods without an interest 

rate adjustment and thus, the same 

potential jump in their interest rates at 

the time of the first interest rate 

adjustment. 

Many industry commenters, including 

large and small bank servicers and 

national and State trade associations, 

recommended against broadening the 

scope of § 1026.20(d) to ARMs that are 

not hybrid. A chief reason for their 

opposition was that including nonhybrid ARMs would go beyond the 

scope of the statute. However, they 

failed to mention that TILA section 

128A(c) explicitly bestows authority on 

the Bureau to ‘‘require the notice in 

128A(b) or other notice consistent with 

this Act for adjustable-rate mortgage 

loans that are not hybrid adjustable-rate 

mortgage loans.’’ 

Many small bank servicers and their 

trade associations recommended 

limiting the scope of the rule to hybrid 

ARMs. These commenters indicated 

that, because they viewed the notice 

required by TILA section 128A as 

confusing and unimportant to 

consumers, it would be advisable to 

limit it to as small a set of ARMs as 

possible. Other reasons these 

commenters opposed the expansion of 

the scope to ARMs that are not hybrid 

included the burden on industry to 

provide additional consumers with the 

initial ARM adjustment notice and that 

hybrid ARMs are considered riskier 

than other ARMs and typically have 

extended fixed-rate periods, thereby 

justifying the need for heightened 

consumer protection. 

The Bureau believes it is appropriate 

to apply the requirements of 

§ 1026.20(d) to all ARMs, not just hybrid 

ARMs. As discussed above, the Bureau 

has the authority to extend the 

requirements to all ARMs, pursuant to 

the savings clause in TILA section 

128A. Further, the Bureau believes that 

consumers of non-hybrid ARMs may 

benefit from the same protections 

afforded to consumers of hybrid ARMs. 

Consumers experience the same 

payment shock at one, three, five, seven 

or ten years regardless of whether the 

interest rate calculation classifies it as a 

hybrid ARM or non-hybrid ARM. 

Accordingly, the Bureau believes that 

the underlying rationale for the 

requirements is equally applicable to all 

ARMs, whether hybrid or non-hybrid, 

and should be extended to all ARM 

consumers. Commenters have not 

demonstrated why consumers of hybrid 

ARMs, as opposed to consumers of nonhybrid ARMs, should receive uniquely 

greater protections or why the consumer 

benefits for non-hybrid ARMs would 

not exceed the costs of providing the 

notice. Nor have these commenters 

suggested why, once systems are put 

into place to provide the notice to 

consumers with hybrid ARMs, it would 

be burdensome to require the same 

notices for consumers with ARMs that 

are not hybrid. Rather, these 

commenters offer only general 

opposition to the requirements of 

§ 1026.20(d) and, accordingly 

recommend a scope for the rule as 

prescribed and limited as possible. As 

set forth above, the Bureau is not 

persuaded by these comments and is 

adopting the final rule as proposed with 

regard to the application of § 1026.20(d) 

to all ARMs. 

Legal Authority 

For the reasons discussed above, the 

final rule’s exemption of home equity 

plans from the requirements of TILA 

128A and § 1026.20(d) is necessary and 

proper under TILA section 105(a) to 

further the consumer protection 

purposes of and facilitate compliance 

with TILA. As discussed above, the 

Bureau believes that the information 

contained in the § 1026.20(d) notice 

would not be meaningful to consumers 

with home equity plans that have 

adjustable-rate features and could lead 

to information overload and confusion 

for those consumers. The Bureau further 

is adopting the exemption for open-end 

transactions pursuant to its authority 

under TILA section 105(f). As discussed 

above, because open-end transactions 

are subject to their own regulatory 

scheme, such transactions are not 

structured in such a way as to garner 

benefit from the § 1026.20(d) disclosures 

and the placement of 128A in TILA 

indicates congressional intent to limit 

its coverage to closed-end transactions, 

the Bureau believes, in light of the 

factors in TILA section 105(f)(2), that 

requiring § 1026.20(d) notices for openend accounts that have adjustable-rate 

features would not provide a 

meaningful benefit to consumers. 

20(d)(1)(ii) Exemptions 

In General 

Proposed § 1026.20(d)(1)(ii) would 

have exempted construction loans with 

terms of one year or less from the 

disclosure requirements of § 1026.20(d). 

Section 1026.20(c) proposed the same 

exemption. Proposed comments 

20(d)(1)(ii)–1 and –2 provided 

clarification, including clarifying that 

certain loans are not ARMs if the 

interest rate or payment change is based 

on factors other than a change in the 

value of an index or formula. 

In response to comments received 

from industry representatives, as 

discussed below, the final rule expands 

the construction loan exemption to all 

ARMs with terms of one year or less. 

Industry commenters requested other 

exemptions from § 1026.20(d) that the 

Bureau declines to adopt. 

No Small Servicer Exemption 

In its proposed rule, the Bureau 

considered small servicer exemptions 

for both § 1026.20(c) and (d) and 

reached the preliminary conclusion that 

an exemption was not appropriate. The 

final rule reaffirms this conclusion and 

thus, small servicers are subject to the 

requirements of both § 1026.20(c) and 

(d). 

Before issuing its proposed rules, the 

Bureau considered the arguments of 

small servicers in favor of a small 

servicer exemption from both 

§ 1026.20(c) and (d). Small community 

banks and credit unions expressed their 

views to the Bureau in the context of the 

Small Business Review Panel convened 

in advance of the issuance of the 2012 

TILA Servicing Proposal. In its 

proposed rule, the Bureau explained 

that the Small Entity Representatives 

which participated in the Small 

Business Review Panel expressed 

opposition to the requirement to 

provide § 1026.20(c) and (d) disclosures 

altogether. Specifically, they doubted 

the value of disclosing certain 

information in the ARM notices, such as 

the maximum interest rate and payment 

and the explanation of how the interest 

rate and payment are determined. The 

Small Entity Representatives also felt 

strongly that consumers would be 

confused by the § 1026.20(d) notices 

because consumers would receive the 

notice so far in advance that the 

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90See Small Business Review Panel Report, at 

20–21, 29–30. 

91See Small Business Review Panel Report, at 

20–21, 29–30. 92See Small Business Review Panel Report, at 21. 

disclosure would contain estimates, 

rather than the actual amounts, of the 

interest rate and mortgage payment.90

The Small Entity Representatives noted 

that, in addition to the requirement to 

provide initial interest rate adjustment 

notices under § 1026.20(d), they would 

be required to provide the actual 

interest rate and payment in the later 

§ 1026.20(c) notice, if the initial interest 

rate adjustment resulted in a payment 

change. They expressed concerns about 

the one-time development costs and ongoing costs associated with providing 

both the initial ARM adjustment notices 

and the potentially recurring notices 

under § 1026.20(c).91

After considering the views of the 

Small Entity Representatives and the 

recommendation of the Small Business 

Review Panel, the Bureau decided not to 

include a small servicer exemption from 

these sections of its proposed rule. The 

Bureau reasoned that small servicers 

were already subject to the requirement 

to provide notices pursuant to 

§ 1026.20(c), so that continuing this 

requirement would not add incremental 

cost (other than the one-time cost of 

development to implement the changes 

proposed by the Bureau). The Bureau 

stated that the initial interest rate 

adjustment notice required by 

§ 1026.20(d) served related but distinct 

purposes, such that eliminating it could 

harm consumers. The Bureau said that 

the § 1026.20(d) notice was designed to 

provide consumers with very early 

warning of their interest rate 

adjustment, so that consumers could 

begin exploring other options. Receiving 

the § 1026.20(c) notice with the actual 

interest rate and payment closer to the 

adjustment date, the Bureau said, would 

be valuable to the consumer both as a 

second warning and as a budgeting tool. 

The Bureau also considered 

exempting small servicers from the 

requirements of § 1026.20(c) for an 

initial interest rate adjustment that 

caused a change in payment. To this 

end, the Bureau considered including 

the information required by proposed 

§ 1026.20(c) in the periodic statement 

proposed by the Bureau in § 1026.41. 

The Bureau concluded that this option 

was unworkable in light of (1) the 

proposed exemption for small servicers 

from the periodic statement 

requirements and (2) the increased 

burden of the resulting programming 

complexity in the periodic statement. 

The Bureau also pointed out that the 

amount of burden reduction from a 

§ 1026.20(c) exemption from an initial 

interest rate adjustment would have 

been extremely minimal, given that 

small servicers still would have had to 

maintain systems to generate 

§ 1026.20(c) notices for any subsequent 

interest rate adjustment resulting in a 

corresponding payment change. Thus, 

the Bureau concluded, exempting small 

servicers from providing a § 1026.20(c) 

notice for the first interest rate 

adjustment would not have provided 

significant burden reduction. 

The Bureau also considered whether 

to exempt small servicers, creditors, and 

assignees from the requirements of 

§ 1026.20(d). As discussed above, the 

Small Entity Representatives expressed 

concern that consumers would be 

confused by receiving estimates, rather 

than their actual new interest rate and 

payment.92 However, the Bureau stated 

in its proposal that it believed the best 

approach to address this concern was to 

clarify the contents of the notice, rather 

than to eliminate it entirely. Congress 

had made a specific policy judgment 

that the early notice would benefit 

consumers. Moreover, the Bureau agrees 

that this measure poses important 

potential benefits to consumers. The 

Bureau went on to say that creating an 

exemption for small creditors, assignees, 

and servicers could have deprived 

certain consumers of the benefits that 

Congress had intended, specifically 

advance notice seven to eight months 

before the first payment at a new level 

would have been due reminding 

consumers of the upcoming adjustment 

and giving them time to weigh the 

potential impacts of a rate change and 

to explore alternative actions. An 

exemption also would have deprived 

those consumers who may become 

financially distressed due to the 

upcoming interest rate change from the 

loss mitigation information disclosed in 

the § 1026.20(d) notice. 

The Bureau stated that, on balance, it 

did not believe that the § 1026.20(d) 

notice would have imposed a significant 

burden on small entities because of its 

one-time occurrence. Moreover, the 

notice was designed to be consistent 

with the § 1026.20(c) notice to, among 

other things, reduce the burden on 

industry. For these reasons and those 

stated above regarding the consumer 

benefits of proposed § 1026.20(d), the 

Bureau’s proposed rule did not exempt 

small servicers from its requirements. 

The Bureau sought comments, in 

addition to the comments it received 

through the Small Business Review 

Panel process, on whether the burden 

imposed on small entities by the ARM 

requirements would outweigh its 

consumer protection benefits. 

Many industry commenters echoed 

the rationales offered by the Small 

Entity Representatives in favor of a 

small servicer exemption from the ARM 

rules. These commenters included three 

national and four State trade 

associations with small servicers as 

constituents and two credit unions. 

Non-profit servicers and State housing 

finance authorities also requested 

exemption from the proposed ARM 

rules. A consumer group recommended 

against such exemptions, stating that 

small servicer failures have the same 

effect on consumers as those of large 

servicers. Many industry commenters 

did not address this issue. 

Advocates of a small servicer 

exemption offered general arguments in 

favor of their position. These 

commenters requested the exemption in 

light of the ‘‘high touch’’ and 

personalized service business model 

used by small servicers. They pointed to 

Bureau representations that small bank 

servicers might be exempted from 

mortgage servicing rules aimed at 

correcting abuses in the market 

perpetrated by other servicers. 

Subjecting small servicers to the ARM 

rules, they predicted, would lead to the 

discontinuation of certain types of loans 

they hold in portfolio and increase the 

cost of credit, to the detriment of 

consumers in general and specifically to 

rural, minority, and middle class 

consumers. Existing rules are adequate, 

one commenter said, because 

refinancing and loan modifications have 

resolved the problems caused by the 

offending ARM products. Some 

commenters said that rules against 

unfair and abusive practices would 

provide adequate incentives for small 

servicers in place of the ARM rules. 

In the final rule, for the reasons set 

forth above, the Bureau declines to 

exempt small servicers from the 

requirements of § 1026.20(c) and (d). In 

addition to the above-cited reasons, the 

Bureau notes that small servicers 

currently are subject to § 1026.20(c) and 

it sees no justification for scaling back 

existing consumer protections. Also, the 

Bureau is revising current § 1026.20(c), 

which is less burdensome to industry 

than if the Bureau was implementing a 

new rule. The Bureau also notes that the 

§ 1026.20(c) notice is a limited notice, 

required only in the case of an interest 

rate adjustment causing a payment 

change. Moreover, the Bureau’s final 

rule reduces industry burden by 

eliminating the annual notice small 

servicers currently are required to 

provide to all ARM holders whose 

interest rates change over the course of 

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www.federalregister.gov/articles/2012/12/17/2012- 

30159/policy-to-encourage-trial-disclosureprograms-information-collection. 

a year without effecting a payment 

change. Thus, the Bureau’s final rule 

reduces the burden of compliance on 

small servicers in this respect, even 

absent an exemption. Also, as stated 

above, creditors, assignees, and 

servicers will have to provide the 

§ 1026.20(c) payment change notice in 

any case, to inform consumers of the 

actual amount of their upcoming new 

mortgage payment. Due to the small 

servicer exemption from the periodic 

statement, their customers will 

otherwise not receive this information 

or be informed of their new mortgage 

payment. 

As stated above, the § 1026.20(d) 

notice is a one-time notice and 

therefore, imposes less burden on small 

servicers than notices that may be more 

frequent, such as the § 1026.20(c) 

payment change notice. Moreover, the 

Bureau’s efforts to make both ARM 

notices consistent with one another 

were intended to reduce the 

implementation burden on servicers, as 

well as to ease the burden on consumers 

to digest two forms that differ greatly 

from one another. For the reasons 

discussed above in the proposed rule 

and in the immediately preceding 

discussion titled Commenters 

recommending against adoption of 

proposed § 1026.20(d), the Bureau 

declines to extend an exemption from 

§ 1026.20(d) for small creditors, 

assignees, and servicers. 

Information Required by ARM 

Disclosures May Not Be Provided 

Instead in the Periodic Statement 

In its proposal, the Bureau also 

solicited comments on whether 

creditors, assignees, and servicers 

should be permitted, or even required, 

to provide the information required by 

§ 1026.20(c) and (d) in the periodic 

statement, in lieu of providing the ARM 

disclosures as separate notices. A large 

bank servicer, a non-bank servicer, and 

a State trade association opposed 

allowing or requiring combining the 

ARM disclosures with the periodic 

statements, asserting that the ARM 

interest rate adjustment information was 

too important to merge with or attach to 

the information in the periodic 

statement. They also warned about the 

challenge posed by complying with the 

timing requirements of the periodic 

statement and § 1026.20(c) and (d) in 

one combined disclosure. A credit 

union trade association supported the 

idea but requested that the Bureau 

provide a model form. Two credit 

unions and a large non-bank servicer 

supported the idea, citing decreased 

cost to industry and the higher 

likelihood of consumers reading the 

ARM information as reasons for their 

support. 

The final rule does not permit 

integrating the ARM § 1026.20(c) and (d) 

notices into the periodic statement. The 

Dodd-Frank Act requires that the 

§ 1026.20(d) notice be provided to 

consumers as a separate notice. 

Moreover, industry comments on the 

utility of combining these disclosures 

were sharply divided. Further, the 

Bureau is concerned that the volume 

and complexity of the information in 

the combined statement could 

overwhelm consumers and create 

greater programming burden on 

industry. Also, this measure would 

provide no benefit to small servicers 

exempt from the periodic statement. 

Finally, the Bureau does not believe that 

providing separate notices creates an 

appreciably greater burden on creditors, 

assignees, and servicers than providing 

them as an integrated notice, especially 

because the final rule permits 

§ 1026.20(d) notices to be provided to 

consumers in the same envelope or 

email with other disclosures, pursuant 

to revised§ 1026.17(a)(1). See the 

section-by-section analysis of 

§ 1026.17(a)(1) and § 1026.20(d) above 

for discussion of the form of delivery 

requirements for § 1026.20(d). 

Accordingly, the Bureau declines to 

permit servicers to provide the 

information required by § 1026.20(c) 

and (d) in the periodic statement in lieu 

of providing the ARM disclosures. 

However, in the interest of ensuring that 

its disclosure rules and model forms are 

based on the best empirical data 

available, pursuant to its authority 

under Dodd-Frank Act section 1032(e), 

the Bureau invites interested creditors, 

assignees, and servicers to consider 

proposing a trial disclosure program to 

test the hypothesis that the disclosures 

required by § 1026.20(c) and (d) could 

be effectively integrated into the 

periodic statement without 

compromising consumer protections. 

The Bureau’s proposed Policy to 

Encourage Trial Disclosure Programs 

sets forth how the Bureau intends to 

exercise its authority under Dodd-Frank 

Act section 1032(e) to permit creditors, 

assignees, and servicers, among others, 

to test alternative disclosures designed 

to improve consumer understanding.93

Exemptions From the Rule 

ARMs with terms of one year or less. 

For the same reasons already discussed 

with respect to the payment change 

notices required by proposed 

§ 1026.20(c), proposed § 1026.20(d) 

would have included an exemption for 

construction ARMs with terms of one 

year or less (except that that timeframe 

within which creditors, assignees, and 

servicers would have had difficulty 

complying was 210 to 240 days before 

the first payment is due after the initial 

adjustment). See section-by-section 

analysis of § 1026.20(c)(1)(ii). On the 

basis of the same comments and for the 

same reasons set forth in the section-bysection analysis of § 1026.20(c)(1)(ii), 

the Bureau concluded that requiring 

notices under § 1026.20(d) for 

construction as well as other ARMs with 

terms of one year or less would not 

provide a meaningful benefit to the 

consumer nor would it have improved 

consumers’ awareness and 

understanding of their ARMs with terms 

of one year or less. Thus, the Bureau is 

adopting the rule with an exemption for 

all ARMs taken out by consumers with 

terms of one year or less. The Bureau 

notes that the ARM rules apply only to 

consumer loans and that proposed 

comment 20(d)(1)(ii)–1, which the 

Bureau is adopting as proposed, applies 

the standards in current comment 

19(b)–1 for determining the term of a 

construction loan and adds clarification 

regarding what other types of loans 

qualify for the expanded short-term 

ARM exemption. 

Non-ARM loans. Proposed comment 

20(d)(1)(ii)–2 discussed other loans to 

which the rule would not have applied. 

Proposed comments 20(c)(1)(ii)–2 and 

20(d)(1)(ii)–3 were consistent with 

regard to the loans which would not 

have been subject to the proposed ARM 

disclosure rules. Certain Regulation Z 

provisions treat some of these loans as 

variable-rate transactions, even if they 

are structured as fixed-rate transactions. 

The proposed comment clarified that, 

for purposes of § 1026.20(d), the 

following loans, if fixed-rate 

transactions, would not have been 

considered ARMs and therefore would 

not have been subject to ARM notices 

pursuant to § 1026.20(d): shared-equity 

or shared-appreciation mortgages; pricelevel adjusted or other indexed 

mortgages that have a fixed rate of 

interest but provide for periodic 

adjustments to payments and the loan 

balance to reflect changes in an index 

measuring prices or inflation; 

graduated-payment mortgages or steprate transactions; renewable balloonpayment instruments; and preferred-rate 

loans. The Bureau observed that the 

particular features of these types of 

loans might trigger interest rate or 

payment changes over the term of the 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10943 

loan or at the time the consumer pays 

off the final balance. However, the 

Bureau stated that these changes were 

based on factors other than a change in 

the value of an index or a formula. For 

example, whether or when the interest 

rate would adjust for the first time for 

a preferred-rate loan with a fixed 

interest rate would likely not be 

knowable six to seven months in 

advance of the adjustment. This was 

because the loss of the preferred rate 

would have been based on factors other 

than a formula or change in the value of 

an index agreed to at consummation. 

The Bureau received no comments on 

this topic and, thus, is adopting the rule 

and commentary 20(d)(1)(ii)–2 as 

proposed. 

Other Requested Exemptions 

A payment-option ARM is one in 

which consumers may select among 

several payments each billing period, 

some of which may not amortize 

principal or may cause negative 

amortization. Typically, the loan 

contract allows for the ARM to ‘‘recast’’ 

or to require an increase in the mortgage 

payment upon reaching a certain 

negative amortization limit. A few 

commenters asked the Bureau either to 

exempt payment-option ARMs from the 

requirements of both § 1026.20(c) and 

(d) or to apply the 25- to 120-day 

advance notice requirement with regard 

to § 1026.20(c). One large bank asked for 

this exemption based on the difficulty of 

closely monitoring such loans to assess 

whether the next minimum periodic 

payment, which typically results in 

negative amortization because it does 

not cover all accrued interest, would 

cause the principal balance to exceed a 

contractual limit and trigger a recast of 

the periodic payment. That commenter 

indicated that it believed in certain 

circumstances the recast of the payment 

would also cause an interest rate 

adjustment. 

The Bureau notes that payment option 

ARMs are subject to current § 1026.20(c) 

and the commenter’s rationale does not 

justify scaling back existing consumer 

protections. Further, the Bureau 

understands from outreach with 

industry that the amount of unpaid 

principal triggers the reamortization of a 

payment-option loan without requiring 

an adjustment to the interest rate. 

Because there is no interest rate 

adjustment, § 1026.20(c) and (d) do not 

impose a requirement on creditors, 

assignees, and servicers to closely 

monitor such loans as presumed by the 

commenter. For these reasons, the 

payment-option ARMs are subject to the 

requirements of § 1026.20(c) and (d). 

A number of industry commenters 

recommended exempting ARMs 

originated prior to the effective date of 

the rule. The Bureau believes that, for 

all the reasons discussed throughout the 

section-by-section analysis, consumers 

with ARMs originated prior to the 

effective date of the rule which adjust 

for the first time after that date could 

benefit from the consumer protections 

afforded by § 1026.20(d) as much as 

consumers with ARMs originated after 

the effective date. In many of these 

cases, the initial rate adjustment will 

occur a year or more after the effective 

date of the rule, exposing those 

consumers to the same risk of payment 

shock as those whose ARMs originate 

after the effective date. Therefore, once 

the final rule takes effect, it applies to 

all ARMs which have not yet adjusted 

for the first time. 

Finally, a national trade association 

representing the reverse mortgage 

industry recommended an exemption 

from the requirements of both 

§ 1026.20(c) and (d) for reverse mortgage 

ARMs. The trade association stated that 

most, if not all, reverse mortgages with 

a variable rate of interest are structured 

as open-end credit transactions. Because 

current § 1026.20(c) and final 

§ 1026.20(c) and (d) apply only to 

closed-end transactions, those 

regulations are not applicable to most 

reverse mortgage ARMs. However, the 

trade association stated, applying the 

new ARM rules to reverse mortgages 

would stifle the industry’s current 

efforts to develop a ‘‘hybrid’’ ARM 

reverse mortgage, which could be 

structured as a closed-end credit 

transaction. They articulated the same 

concerns raised by other industry 

commenters that the 210- to 240-day 

advance notice required by § 1026.20(d) 

would require disclosure of an estimate 

that will be inaccurate by the time the 

rate adjusts and, thus, will result in 

consumer confusion. They also 

questioned whether § 1026.20(d) notices 

would be required for closed-end 

reverse mortgages because they do not 

carry regular monthly payment 

obligations and that such a requirement 

would be meaningless to consumers 

with closed-end variable-rate reverse 

mortgages. 

The Bureau believes that, if the 

reverse mortgage industry chooses to 

create a closed-end adjustable-rate 

product, consumers with those reverse 

mortgages, like those with other types of 

ARMs, would benefit from advance 

warning of interest rate adjustments to 

help them better manage their 

mortgages. For the reasons set forth in 

the section-by-section analysis of 

§ 1026.20(d) below, the Bureau further 

believes that providing consumers with 

an estimate of their upcoming new 

interest rate, pursuant to § 1026.20(d), 

provides the important consumer 

protection benefit of alerting consumers 

to a potential interest rate increase and 

to provide sufficient time to pursue 

other alternatives. Finally, the Bureau 

notes that creditors, assignees, and 

servicers are permitted to modify the 

notices required by § 1026.20(c) and (d) 

to accommodate credit transactions 

outside of the norm covered by the rule, 

such as reverse mortgages. For the 

reasons discussed above and throughout 

this rule, the Bureau declines providing 

an exemption for reverse mortgage 

ARMs subject to the requirement of 

§ 1026.20(c) and (d). 

Legal Authority 

The Bureau uses its authority under 

TILA section 105(a) to exempt shortterm consumer ARMs with terms of one 

year or less from the requirements of 

TILA section 128A and § 1026.20(d). As 

explained above, the disclosure 

requirements of § 1026.20(d) would be 

confusing and difficult to comply with 

in the context of a short-term consumer 

loan. Thus, exempting such loans is 

necessary and proper under TILA 

section 105(a) to further the consumer 

protection purposes of TILA and 

facilitate compliance. The Bureau 

further exempts these loans pursuant to 

its authority under TILA section 105(f). 

For the reasons discussed above, the 

Bureau believes, in light of the factors 

in TILA section 105(f)(2), that requiring 

the § 1026.20(d) notice for consumer 

loans with terms of one year or less 

would not provide a meaningful benefit 

to consumers. Specifically, the Bureau 

considers that the exemption is proper 

irrespective of the amount of the loan or 

the status of the consumer (including 

related financial arrangements, financial 

sophistication, and the importance to 

the consumer of the loan). Finally, the 

non-ARM loans listed above, because 

they are not ARMs, are not subject to 

TILA section 128A or proposed 

§ 1026.20(d) and therefore require no 

disclosures under the rule. 

20(d)(2) Content 

Initial Rate Adjustment Disclosures 

In General 

Statutorily-required content. TILA 

section 128A requires that the following 

content be included in the § 1026.20(d) 

initial rate adjustment notice: (1) Any 

index or formula used in adjusting or 

resetting the interest rate and a source 

of information about the index or 

formula; (2) an explanation of how the 

new rate and payment would be 

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determined, including how the index 

may be adjusted, such as by the addition 

of a margin; (3) a good faith estimate, 

based on accepted industry standards, 

of the amount of the resulting monthly 

payment after the adjustment or reset 

and the assumptions on which the 

estimate is based; (4) a list of 

alternatives that the consumers may 

pursue, including refinancing, 

renegotiation of loan terms, payment 

forbearance, and pre-foreclosure sales, 

as well as descriptions of actions the 

consumer must take to pursue these 

alternatives; (5) contact information for 

HUD- or State housing finance authority 

approved housing counselors or 

programs reasonably available; and (6) 

contact information for the State 

housing finance authority for the State 

where the consumer resides. In its 

proposal, the Bureau interpreted the 

explanation mandated by (2) above to 

require disclosure of any adjustment to 

the applicable index, including the 

amount of any margin and an 

explanation of what a margin is; the 

loan balance; the length of the 

remaining term of the loan; and any 

change in the term of the loan caused by 

the interest rate adjustment. 

Good faith estimate. TILA section 

128A requires that § 1026.20(d) interest 

rate adjustment disclosures include ‘‘[a] 

good faith estimate, based on accepted 

industry standards * * * of the amount 

of the monthly payment that will apply 

after the date of the adjustment or reset, 

and the assumptions on which the 

estimate is based.’’ In the proposed rule, 

the Bureau interpreted this statutory 

standard to require disclosure to 

consumers of the index rate or formula; 

any adjustment to the index or formula, 

such as the addition of a margin or 

carryover interest; the loan balance; and 

the remaining loan term because each of 

these elements are used to calculate the 

new payment. 

The proposal also reasoned that most 

ARM contracts base the calculation of 

the new interest rate and payment on an 

index value published far closer to the 

date of the interest rate adjustment than 

those available during the 210 to 240 

days before the first payment at a new 

level is due after an interest rate 

adjustment. See the section-by-section 

analysis of § 1026.20(c)(2) above for the 

discussion in the Bureau’s proposal of 

the timeframe it generally would have 

required for ascertaining the index rate 

used to calculate the adjusted interest 

rate and new payment for the proposed 

ARM payment change notices. The 

Bureau thus concluded that it was 

unlikely creditors, assignees, and 

servicers would be able to disclose the 

actual new interest rate and payment in 

the initial ARM interest rate notices. 

The Bureau reasoned that, consistent 

with the language of the statute 

regarding estimates, proposed 

§ 1026.20(d)(2) would have required 

estimates, labeled as such, if the new 

interest rate or any other calculation 

using the new interest rate were not 

known as of the date of the disclosure. 

See also proposed comment 

20(d)(2)(iii)(A)–1. 

The Bureau also interpreted the 

statutory good faith standard to require 

disclosure of the actual amounts, if they 

are available at the time the creditor, 

assignee, or servicer provides the initial 

ARM interest rate adjustment notices to 

consumers. The Bureau concluded that, 

because the notice was designed to alert 

consumers to upcoming changes to their 

mortgages and to provide consumers 

with the time needed to take 

ameliorative actions should the new 

interest rate and payment be too high, 

providing the actual new payment, if it 

were known, would benefit consumers. 

The Bureau stated that, across all 

rounds of consumer testing, most 

participants shown notices containing 

estimates of the new rate and payment 

understood that these amounts were 

estimates that could change before the 

first payment at a new level was due.94

Proposed § 1026.20(d) also would 

have required that any estimate be 

calculated using the index figure 

disclosed in the source of information 

described in § 1026.20(d)(2)(iii)(A) 

within 15 business days prior to the 

date of the disclosure. Linking the date 

of the notice to the date of the index 

value used to estimate the new interest 

rate and payment, the Bureau reasoned, 

would have prevented confusion as to 

the recency of the index value. Pursuant 

to the timeframe discussion above in the 

section-by-section analysis of 

§ 1026.20(c)(2), the 15-day period would 

have allowed creditors, assignees, and 

servicers sufficient time to calculate the 

estimates and perform any necessary 

quality control measures before 

providing the § 1026.20(d) notices to 

consumers. 

The Bureau received no comments on 

these aspects of the good faith estimate 

requirement and is adopting the final 

rule as proposed. See also the sectionby-section analysis of § 1026.20(d) 

above for a discussion of industry 

opposition to the use of estimates in the 

§ 1026.20(d) notice. 

Additional content. In addition to the 

content explicitly required under the 

statute, the Bureau proposed, as 

discussed in more detail below, to 

require the ARM initial interest rate 

adjustment notices to include the date 

of the disclosures; the telephone 

number of the creditor, assignee, or 

servicer; statements specifying that the 

consumer’s interest rate was scheduled 

to adjust pursuant to the terms of the 

loan, that the adjustment might effect a 

change in the mortgage payment, the 

specific time period the current interest 

rate had been in effect, the dates of the 

upcoming and future interest rate 

adjustments, and any other changes to 

loan terms, features, or options that 

would take effect on the same date as 

the interest rate adjustment; the due 

date of the first payment after the 

adjustment; for interest-only or 

negatively-amortizing payments, the 

amount of the current and new payment 

allocated to principal, interest, and 

taxes and insurance in escrow, as 

applicable; a statement regarding 

payment allocation for interest-only and 

negatively-amortizing loans, including 

the payment required to amortize fully 

an ARM that became negativelyamortizing as a result of the interest rate 

adjustment; any interest rate or payment 

limits and any foregone interest; if the 

new interest rate or new payment 

provided was an estimate, a statement 

that another disclosure containing the 

actual new interest rate and payment 

would be provided within a specified 

time period if the actual interest rate 

adjustment resulted in a corresponding 

payment change; and the amount and 

expiration date of any prepayment 

penalty. 

Many industry commenters 

recommended that the Bureau eliminate 

certain of the content required by the 

Dodd-Frank Act and refrain from 

including other content not statutorilyrequired. The Bureau directs readers to 

the specific content sections below for 

discussion of comments received and 

the Bureau’s decisions with regard to 

the final rule. The Bureau notes that it 

is exercising its exception authority in 

the final rule to modify the proposed 

requirements regarding contact 

information for homeownership 

counselors and counseling organizations 

and State housing finance authorities 

and the prepayment penalty. 

Legal Authority 

As discussed above, TILA section 

128A(b) expressly requires much of the 

content included in the initial interest 

rate disclosures. The Bureau is 

implementing these statutory 

requirements pursuant to its authority 

under TILA section 105(a). The 

additional content is likewise 

authorized under TILA section 105(a). 

As further discussed below, the 

additional content is necessary and 

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proper to assure that consumers 

understand the consequences of the 

upcoming ARM interest rate 

adjustments and have sufficient time to 

adjust their behavior accordingly, 

thereby avoiding the uninformed use of 

credit and protecting consumers against 

inaccurate and unfair credit billing 

practices. The additional content is 

further authorized under Dodd-Frank 

Act section 1032 by assuring that the 

key features of consumers’ adjustablerate mortgage, over the term of the ARM, 

are ‘‘fully, accurately, and effectively 

disclosed to consumers in a manner that 

permits consumers to understand [its] 

costs, benefits, and risks.’’ The 

additional information better informs 

consumers of the implications of 

interest-rate adjustments before they 

happen and thus enables them to weigh 

their options going forward. For the 

same reasons, the Bureau believes, 

consistent with Dodd-Frank Act section 

1405(b), that the additional content 

improves consumer awareness and 

understanding of their residential ARM 

loans and is thus in the interest of 

consumers and in the public interest. 

The additional content is also consistent 

with TILA section 128A(b) itself, which 

provides a non-exclusive list of required 

content, thereby statutorily 

contemplating additional content. 

20(d)(2)(i) 

Date of the Disclosure 

Proposed § 1026.20(d)(2)(i) would 

have required inclusion of the date of 

the disclosure in the initial ARM 

adjustment notices. To group together 

all data directly related to the ARM 

itself, proposed § 1026.20(d)(3)(ii) 

would have required that the date 

appear outside of and above the table 

described in proposed § 1026.20(d)(3)(i). 

Proposed comment 20(d)(2)(i)–1 

explained that the date on the notice 

would have been the date the creditor, 

assignee, or servicer generated the 

notice. Proposed § 1026.20(d)(2) would 

have required that date to be within 15 

business days after publication of the 

index level used to calculate the 

adjusted interest rate and new payment, 

if it was an estimated and not actual 

adjusted interest rate and new payment. 

Because, under the proposal, consumers 

would have received the disclosures so 

far in advance, the Bureau expected 

estimates would have been used in most 

cases. As stated above, tying the date of 

the disclosure to the publication date of 

the index level, the Bureau concluded, 

would prevent consumer confusion as 

to the recency of the index value upon 

which the estimated interest rate and 

new payment was based. 

The Bureau received no comment on 

this topic. The Bureau is adopting the 

final rule as proposed. 

20(d)(2)(ii) 

Statement Regarding Changes to Interest 

Rate and Payment 

Proposed § 1026.20(d)(2)(ii)(A) would 

have required the initial ARM interest 

rate adjustment notices to include a 

statement alerting consumers that, 

under the terms of their adjustable-rate 

mortgage, the specific period in which 

their current interest rate has been in 

effect would end on a certain date, that 

their interest rate might change on that 

date, and that any change in their 

interest rate might result in a change to 

their mortgage payment. This 

information, the Bureau said, is similar 

to the pre-consummation disclosures 

required by current § 1026.19(b)(2)(i) 

and § 1026.37(j) as proposed in the 2012 

TILA–RESPA Proposal. Proposed 

comment 20(d)(2)(iii)(A)–1 clarified that 

the current interest rate was the interest 

rate that would be in effect on the date 

of the disclosure. 

Proposed § 1026.20(d)(2)(ii)(B) would 

have required the initial ARM interest 

rate adjustment notices to include the 

dates of the impending and future 

interest rate adjustments. Proposed 

§ 1026.20(d)(2)(ii)(C) also would have 

required disclosure of any other loan 

changes taking place on the same day as 

the adjustment, such as changes in 

amortization caused by the expiration of 

interest-only or payment-option 

features. 

The Bureau explained that the first 

ARM model form tested did not contain 

the statement informing consumers of 

impending and future changes to their 

interest rate and the basis for these 

changes. Although participants 

understood that their interest rate would 

adjust and their payment might change 

as a result, they did not understand that 

these changes would occur periodically, 

subject to the terms of their mortgage 

contract. Inclusion of this statement in 

the second round of testing successfully 

resolved this confusion. All but one 

consumer tested in rounds two and 

three of testing understood that, under 

the scenario presented to them, their 

interest rate would change on an annual 

basis.95 In the absence of comments 

regarding this provision, the Bureau is 

adopting the final rule as proposed. 

20(d)(2)(iii) 

Table With Current and New Interest 

Rates and Payments 

Proposed § 1026.20(d)(2)(iii) would 

have required disclosure of the 

following information in the form of a 

table: (A) The current and new interest 

rates; (B) the current and new periodic 

payment amounts and the date the first 

new payment is due; and (C) for 

interest-only or negatively-amortizing 

payments, the amount of the current 

and new payment allocated to interest, 

principal, and property taxes and 

mortgage-related insurance, as 

applicable. The information in this table 

would have appeared within the larger 

table containing the other required 

disclosures, except for the date of the 

disclosure. Proposed comment 

20(d)(iii)(A)–1 would have clarified the 

difference between the current and new 

interest rate. 

This table would have followed the 

same order as, and had headings and 

format substantially similar to, those in 

the table in model forms H–4(D)(3) and 

(4) in appendix H of subpart C. The 

Bureau stated that it confirmed through 

its consumer testing that, when 

presented with information in a logical 

order, participants more easily grasped 

the complex concepts contained in the 

proposed § 1026.20(d) notice. For 

example, the form would have begun by 

informing consumers of the basic 

purpose of the notice: Their interest rate 

was going to adjust, when it would 

adjust, and the adjustment could change 

their mortgage payment. This 

introduction would have been 

immediately followed by a visual 

illustration of this information in the 

form of a table comparing consumers’ 

current and new interest rates. Based on 

its consumer testing, the Bureau stated 

that it believed that the understanding 

of the consumers tested was enhanced 

by presenting the information in a 

simple manner, grouped together by 

concept, and in a specific order that 

allows consumers the opportunity to 

build upon knowledge gained. For these 

reasons, the Bureau proposed that 

creditors, assignees, and servicers 

disclose the information in the table as 

set forth in model forms H–4(D)(3) and 

(4) in appendix H. 

In all rounds of testing, consumers 

were presented with model forms with 

tables depicting a scenario in which the 

interest rate and payment were 

projected to increase as a result of the 

adjustment. All participants in all 

rounds of testing understood that their 

interest rate and payment were 

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96Macro Report, at vii. 

97Macro Report, at vii–viii. The allocation table 

for interest-only and negatively-amortizing ARMs 

was revised after the third and final round of testing 

and is identical in the final rule in § 1026.20(c) and 

(d). 98Macro Report, at 15. 

projected to increase and when these 

changes would occur.96

The Bureau proposed including 

allocation information in the table for 

interest-only and negatively-amortizing 

ARMs only. The Bureau stated it 

believed that providing the payment 

allocation information would have 

helped consumers better understand the 

risk of these products by demonstrating 

that their payments would not have 

reduced the loan principal. The Bureau 

also said that providing the payment 

allocation would have helped 

consumers understand the effect of the 

interest rate adjustment, especially in 

the case of a change in the ARM’s 

features coinciding with the first 

interest rate adjustment, such as the 

expiration of an interest-only or 

payment-option feature. Because 

payment allocation might change over 

time, the rule would have required 

disclosure of the expected payment 

allocation for the first payment period 

during which the adjusted interest rate 

would have applied. 

The Bureau explained that the notice 

disclosing an allocation of payment for 

interest-only or negatively-amortizing 

ARMs was not tested until the third 

round of testing. The notice tested set 

forth the following scenario to 

consumers: The first adjustment of a 

3/1 hybrid ARM—an ARM with a fixed 

interest rate for three years followed by 

annual interest rate adjustments—with 

interest-only payments for the first three 

years. On the date of the adjustment, the 

interest-only feature would expire and 

the ARM would become amortizing. 

Only about half of the participants 

understood that their payments were 

changing from interest-only to 

amortizing. Participants generally 

understood the concept of allocation of 

payments but were confused by the 

table in the notice that broke out 

principal and interest for the current 

payment, but combined the two for the 

new amount. As a result, this table was 

revised so that separate amounts for 

principal and interest were shown for 

all payments.97

The Bureau recognized that certain 

Dodd-Frank Act amendments to TILA 

pose restrictions on the origination of 

non-amortizing and negativelyamortizing loans. For example, TILA 

section 129C requires creditors to 

determine that consumers have the 

ability to repay the mortgage loan before 

lending to them and that this assumes 

a fully-amortizing payment. The Bureau 

thought it possible that this law and its 

implementing regulations would restrict 

the origination of risky mortgages such 

as interest-only and negativelyamortizing ARMs. 

The Bureau stated that other DoddFrank Act amendments to TILA, such as 

the proposed periodic statement 

provisions discussed below, would 

provide payment allocation information 

to consumers for each billing cycle. 

Thus, consumers with interest-only or 

negatively-amortizing loans, or those 

who might obtain such loans in the 

future, would receive information about 

the interest-only or negativelyamortizing features of their loans 

through the payment allocation 

information in the periodic statement. 

Also, as stated above, consumer testing 

showed that participants tested were 

confused by the allocation table. In view 

of these changes to the law and the 

outcome of consumer testing, the 

Bureau solicited comments on whether 

to include allocation information for 

interest-only and negatively-amortizing 

ARMs in the proposed table described 

above. 

A trade association generally 

supported the tabular format, stating 

that consumer testing has repeatedly 

proven its effectiveness. A large bank 

recommended eliminating altogether the 

table with the current and new interest 

rates and payments because, it said, the 

table tested poorly with consumers and 

would confuse them as well as be 

duplicative of the proposed periodic 

statement. Other commenters 

recommended eliminating only the 

portion of the table disclosing allocation 

information for interest-only and 

negatively-amortizing ARMs while one 

large bank commended the Bureau for 

adding these disclosures to the 

§ 1026.20(c) notice. Those commenters 

in favor of eliminating allocation 

information for these ARMs said the 

information was not fully consumer 

tested, would be based on projections 

that would confuse and distract 

consumers, and would require costly 

software upgrades. Most of these 

commenters recommended substituting 

the statement for interest-only and 

negatively-amortizing ARMs required by 

§ 1026.20(d)(2)(vii) in place of the 

allocation information; one large bank 

suggested expanding the language in 

these statements as a substitute for the 

allocation information. This large bank 

also said the allocation information 

would confuse consumers because, in 

the case of a negatively-amortizing 

ARM, the portion allocated to principal 

would have to be expressed as a 

negative number. One trade association 

recommended allowing estimated 

escrow payments for the new payment 

allocation table, which is what the rule 

proposed and the Bureau is adopting in 

§ 1026.20(d)(2)(iii)(C). 

The Bureau is adopting 

§ 1026.20(d)(2)(iii) as proposed for the 

reasons set forth in the proposal and 

those set forth below. The table is the 

centerpiece of the § 1026.20(d) 

disclosure and contains some of the 

disclosure’s most important 

information: The consumers’ upcoming 

new interest rate and payment set forth 

next to their current rate and payment, 

such that consumers can make 

comparisons. This information informs 

consumers of the exact or estimated 

amount of the new mortgage payment 

they must pay starting in seven to eight 

months and the table allows easy 

comparison with their current charges, 

helping consumers decide on how best 

to proceed. Also, the periodic statement 

will provide consumers with only part 

of the information in the table: The date 

after which the interest rate will adjust 

and the amount of the next payment. 

Moreover, the periodic statement 

generally would provide consumers 

with a month warning before a payment 

increase, rather than the minimum 210- 

day advance notice required by 

§ 1026.20(d). 

Because interest-only and negativelyamortizing ARMs pose more potential 

risk to consumers than conventional 

ARMs, the Bureau believes that 

providing consumers with the actual or 

estimated payment allocations for when 

their interest rates adjust will provide a 

comprehensible snapshot of the 

projected consequences of the upcoming 

adjustments and better enable those 

consumers to manage their mortgages. 

The table itself tested well with 

consumers; the allocation breakdown 

for the new payment for interest-only 

and negatively-amortizing ARMs did 

not test as well. As discussed above, the 

Bureau revised the model forms to 

address that problem. Moreover, the 

periodic statement contains a similar 

allocation table for the upcoming 

mortgage payment and testing of the 

periodic statement went well and raised 

no concerns regarding projected 

principal, interest, and escrow— 

including for payment-option loans.98

In addition, as set forth in the periodic 

statement sample form in appendix H– 

30(C), the allocation of principal for 

negatively-amortizing loans is zero, and 

not a negative number. 

Also, the proposed rule clearly set 

forth the bases upon which to make the 

projections for the allocation table for 

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99Macro Report, at viii. 

100Macro Report, at viii. 

101Macro Report, at viii–ix. ‘‘If not for this rate 

limit, your estimated rate on [date] would be [x]% 

higher’’ was replaced with ‘‘We did not include an 

additional [x]% interest rate increase to your new 

rate because a rate limit applied.’’ 

these ARMs, as well as for loan 

balances. See the section-by-section 

analysis of § 1026.20(d)(2)(vi) below 

regarding loan balances. For certain 

consumers, such as those who are 

delinquent, who may choose to pay 

ahead, or who have payment-option 

ARMs, the projected amount may not 

prove to be the actual amount. However, 

servicers routinely project expected 

payment allocations and loan balances 

any time they provide consumers with 

a future payment amount, such as in the 

periodic statement. The Bureau also 

notes that the use of allocation tables 

showing projected payments is an 

established practice in Regulation Z, as 

illustrated, for example, in appendices 

H–4(E) and (F). Also, the Bureau expects 

the origination of these risky loans will 

continue to decline in light of the 

qualified mortgage rules implementing 

TILA section 129C, thereby reducing the 

burden on servicers to provide the 

§ 1026.20(d) allocation table. For these 

reasons and the reasons set forth in the 

proposed rule, the Bureau is adopting 

the final rule as proposed. The Bureau 

is adopting comment 20(d)(2)(iii)(A)–1 

with the additional clarification that the 

new payment, if calculated from an 

estimated interest rate, will also be an 

estimate and that creditors, assignees, 

and servicers may round the interest 

rate, pursuant to the requirements of the 

ARM contract. 

20(d)(2)(iv) 

Explanation of How the Interest Rate Is 

Determined 

TILA section 128A mandates that the 

initial interest rate adjustment notices 

include any index or formula used in 

making adjustments to or resetting the 

interest rate, and a source of information 

about the index or formula. 

Accordingly, proposed 

§ 1026.20(d)(2)(iv)(A) would have 

required disclosure of the index and 

published source of the index or 

formula. This disclosure requirement 

mirrored the pre-consummation 

disclosure required around the time of 

application by current rule 

§ 1026.19(b)(2)(iii). Section 1026.37(j), 

proposed in the 2012 TILA–RESPA 

Proposal, likewise would require 

disclosure of the index name prior to 

consummation. 

TILA section 128A also mandates that 

the initial interest rate disclosures 

include an explanation of how the new 

interest rate and payment would be 

determined, including an explanation of 

any adjustment to the index, such as by 

the addition of a margin. Proposed 

§ 1026.20(d)(2)(iv) would have required 

§ 1026.20(d) notices to include an 

explanation of how the new interest rate 

would have been determined. The 

Bureau noted that this disclosure 

requirement was consistent with the 

pre-consummation disclosure 

requirements of current rule 

§ 1026.19(b)(2)(iii). The 2012 TILA– 

RESPA Proposal’s 1026.37(j) likewise 

would require disclosure prior to 

consummation of the amount of the 

margin expressed as a percentage. 

Consumer testing revealed that 

participants generally had difficulty 

understanding the relationship of the 

index, margin, and interest rate.99 The 

Bureau said this was the reason it 

proposed a relatively brief and simple 

explanation that the new interest rate 

would be calculated by taking the 

published index rate and adding a 

certain number of percentage points, 

called the ‘‘margin.’’ Proposed 

§ 1026.20(d)(2)(iii) also would have 

required disclosure of the specific 

amount of the margin. 

Consumer testing indicated that the 

explanation helped participants better 

understand the relationship between the 

interest rate, index, and margin. As 

stated in the proposal, it also helped 

dispel the notion held by many of the 

consumers in the initial rounds of 

testing that creditors subjectively 

determined their new interest rate at 

each adjustment.100 The Bureau stated 

that it believed the proposed rule and 

forms struck an appropriate balance 

between providing consumers with key 

information necessary to understand the 

basis of their ARM interest rate 

adjustments without overloading 

consumers with complex and confusing 

technical information. 

Other than a comment regarding the 

application of previously unapplied 

carryover interest, or applied carryover 

interest, to the calculation of the new 

interest rate, which is relevant to 

§ 1026.20(c) and not (d), the Bureau did 

not receive any comments on the 

explanation of how the interest rate is 

determined. In response to that 

comment, the Bureau modified the 

proposed rule to include the type and 

amount, rather than just the type, of any 

adjustment to the index and removed 

disclosure of the amount of any 

adjustment from the ensuing 

requirement to explain how the new 

payment is determined. In this way, 

consumers are informed of the existence 

and amounts of all elements used to 

calculate their new interest rates, rather 

than learning about the amount further 

on in the disclosure. See the section-bysection analysis of § 1026.20(c)(2)(iii) 

above for further discussion of this 

modification. 

20(d)(2)(v) 

Rate and Payment Limits and Unapplied 

Carryover Interest 

Proposed rule § 1026.20(d)(2)(v) 

would have required the disclosure of 

any limits on the interest rate or 

payment increases at each adjustment 

and over the life of the loan. The Bureau 

stated that it believed that knowing the 

limitations of their ARM rates and 

payments would help consumers 

understand the consequences of each 

interest rate adjustment and weigh the 

relative benefits of the alternatives that 

would have been disclosed under 

proposed § 1026.20(d)(2)(viii). The 

Bureau gave the example that if an 

adjustment caused a significant increase 

in the consumer’s payment, knowing 

how much more the interest rate or 

payment could increase would better 

inform the consumer’s decision on 

whether or not to seek alternative 

financing. 

Proposed § 1026.20(d)(2)(v) also 

would have required disclosure of the 

extent to which the creditor, assignee, or 

servicer had foregone any increase in 

the interest rate due to a limit, called 

unapplied carryover interest, and the 

earliest date such foregone interest 

could be applied. Proposed comment 

20(d)(2)(v)–1 would have explained that 

disclosure of foregone interest rate 

increases would apply only to 

transactions permitting interest rate 

carryover. It further would have 

explained that the amount of foregone 

interest rate increase at the initial 

adjustment was the amount that, subject 

to rate caps, could be added to future 

interest rate adjustments to increase, or 

offset decreases in, the rate determined 

according to the index or formula. 

The Bureau reported that the 

consumers tested had difficulty 

understanding the concept of interest 

rate carryover when it was introduced 

during the third round of testing. The 

Bureau attributed this difficulty to the 

simultaneous introduction of other 

complex notions, such as interest-only 

or negatively-amortizing features and 

the allocation of interest, principal, and 

escrow payments for such loans. In 

response, the Bureau simplified the 

explanation of carryover interest to 

address this possible confusion.101

In its proposed rule, the Bureau 

recognized that the disclosure of rate 

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10948 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

limits and unapplied carryover interest 

would have provided information that 

might help consumers better understand 

their ARMs. However, the Bureau stated 

that it was considering whether the 

assistance this information would have 

provided outweighed its potential 

distraction from other more key 

information. Also, as explained above, 

consumers had difficulty understanding 

the concept of carryover interest and the 

Bureau was concerned that this 

difficulty might diminish the 

effectiveness of the proposed 

§ 1026.20(d) disclosures. The Bureau 

solicited comments on whether to 

include rate limits and unapplied 

carryover interest in the proposed 

§ 1026.20(d) disclosures. 

The Bureau received few comments 

regarding the proposed disclosure of 

rate limits and unapplied carryover 

interest. A credit union supported 

inclusion of the rate and payment limits 

in the § 1026.20(d) notice and a large 

bank servicer and a large non-bank 

servicer recommended against it. A 

large bank servicer commented that 

consumers do not need this information 

because they receive it at consummation 

and including it in the § 1026.20(d) 

notice would distract and confuse them. 

The non-bank servicer and a trade 

association said the unapplied carryover 

interest was unrelated to the interest 

rate adjustment and would confuse 

consumers. See the section-by-section 

analysis of § 1026.20(c)(2)(iii) and 

20(c)(2)(iv) above for a discussion of 

unapplied interest rate increases. 

In addition, a credit union and a State 

trade association recommended the 

Bureau eliminate disclosure of carryover 

interest altogether, asserting that it is too 

complex and unnecessary for consumers 

to understand and it would distract 

consumers from other information 

contained in the § 1026.20(d) notices. A 

large servicer suggested the alternative 

of including this information in the 

periodic statement instead of the 

§ 1026.20(d) notice. 

Because most ARMs covered by this 

rule will adjust a year or more after 

consummation, the Bureau disagrees 

that information provided at 

consummation suffices to adequately 

inform consumers about carryover 

interest and rate limits. Moreover, 

carryover interest is an essential 

element in the determination of the new 

interest rate and payment. For these 

reasons and the reasons in the Bureau’s 

proposed rule, the Bureau is adopting 

the final rule as proposed. The Bureau 

also is adopting proposed comment 

20(d)(2)(v)–1, with slight modifications 

to clarify the definition of carryover 

interest. 

20(d)(2)(vi) 

Explanation of How the New Payment Is 

Determined 

TILA section 128A mandates that the 

initial interest rate notices include an 

explanation of how the new interest rate 

and payment would be determined, 

including an explanation of how the 

index was adjusted, such as by the 

addition of a margin. Proposed 

§ 1026.20(d)(2)(vi) would have 

implemented this statutory provision by 

requiring the content discussed below. 

The proposed disclosure would have 

been consistent with the disclosures 

required at the time of application 

pursuant to current § 1026.19(b)(2)(iii). 

The Bureau also stated that its proposal 

was consistent with content proposed in 

§ 1026.20(c) and thus would have 

promoted consistency in Regulation Z 

ARM disclosures. 

Proposed § 1026.20(d)(2)(vi) would 

have required ARM disclosures to 

explain how the new payment was 

determined, including (A) the index or 

formula, (B) any adjustment to the index 

or formula, such as by addition of the 

margin, (C) the loan balance, (D) the 

length of the remaining loan term, and 

(E) if the new interest rate or new 

payment provided was an estimate, a 

statement that another disclosure 

containing the actual new interest rate 

and new payment would be provided to 

the consumer between two and four 

months prior to the date the first new 

payment would be due, if the interest 

rate adjustment would cause a 

corresponding change in payment, 

pursuant to § 1026.20(c). 

The proposal would have required 

disclosure of both the loan balance and 

the remaining loan term expected on the 

date of the interest rate adjustment. The 

proposed rule also would have required 

disclosure of any change in the term of 

the loan caused by the adjustment. As 

discussed in proposed 

§ 1026.20(d)(2)(iv) above, the Bureau 

stated its belief that this explanation 

would have helped consumers better 

understand how these factors determine 

their new payment and would have 

dispelled the notion held by many 

consumers in the initial rounds of 

testing that, at each adjustment, the 

creditor subjectively determined their 

new interest rate, and thus the new 

payment. The Bureau stated that 

disclosure of the four key assumptions 

upon which the new payment would be 

based would have provided a succinct 

overview of how the interest rate 

adjustment works. It also would have 

demonstrated that factors other than the 

index could increase consumers’ 

interest rates and payments. Disclosures 

of these factors, the Bureau said, would 

have provided consumers with a 

snapshot of the current status of their 

adjustable-rate mortgages and with basic 

information to help them make 

decisions about keeping their current 

loan or shopping for alternatives. As set 

forth above, if an estimated new interest 

rate and new payment were used, 

consumers would have been informed 

by a statement in the § 1026.20(d) notice 

that they would receive another 

disclosure containing their actual new 

interest rate and new payment between 

two and four months in advance of the 

due date of their first new payment—if 

the interest rate adjustment would result 

in a corresponding payment change. 

Two commenters voiced concern over 

having to project an estimate of the loan 

balance, as required in the proposed 

rule. For a discussion of the use of 

projections of scheduled payments for 

interest-only and negatively-amortizing 

ARMs, as well as for the loan balance, 

see the section-by-section analysis of 

§ 1026.20(d)(2)(iii) above. The final rule 

adds emphasis regarding the use of 

estimates in the § 1026.20(d) model 

forms to further alert consumers to their 

use, including that a recent index rate 

is used in the calculation of the new 

interest rate and payment and 

underlining of the word ‘‘estimate.’’ The 

Bureau did not receive other specific 

comments regarding § 1026.20(d)(2)(vi) 

apart from one community bank 

recommending against the inclusion of 

similar information in both the 

explanation of how the interest rate is 

calculated and the explanation of how 

the new payment is determined. The 

Bureau points out that the components 

of the interest rate calculation are also 

components of how the new payment is 

determined and therefore, the Bureau 

will retain these common components 

in § 1026.20(d)(2)(vi). However, to avoid 

redundancy, the final rule does not 

require reiteration of the amount of the 

margin or any other adjustment to the 

index. 

For these reasons and the reasons 

articulated in the proposed rule, the 

Bureau is adopting § 1026.20(d)(2)(vi) 

and comment 20(d)(2)(vi)–1 as 

proposed, except the final rule does not 

require disclosure of the specific 

amount of any adjustment to the margin, 

because that data is provided in the 

final rule under § 1026.20(d)(2)(iv). 

20(d)(2)(vii) 

Interest-Only and NegativeAmortization Statement and Payment 

Proposed § 1026.20(d)(2)(vii) would 

have required § 1026.20(d) notices to 

include a statement regarding the 

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102Macro Report, at vi. 

allocation of payments to principal and 

interest for interest-only or negativelyamortizing ARMs. If negative 

amortization occurred as a result of the 

interest rate adjustment, the proposed 

rule would have required disclosure of 

the payment necessary to amortize fully 

such loans at the new interest rate over 

the remainder of the loan term. As the 

Bureau explained in proposed comment 

20(d)(2)(vii)–1, for interest-only loans, 

the statement would have informed the 

consumer that the new payment would 

cover all of the interest but none of the 

principal owed and, therefore, would 

not reduce the loan balance. For 

negatively-amortizing ARMs, the 

statement would have informed the 

consumer that the new payment would 

cover only part of the interest and none 

of the principal, and therefore the 

unpaid interest would add to the 

balance. 

See the section-by-section analysis of 

§ 1026.20(c)(2)(vi) above for a 

discussion of the Board’s 2009 ClosedEnd Proposal to revise current 

§ 1026.20(c) with regard to nonamortizing and negatively-amortizing 

loans and Dodd-Frank amendments to 

TILA that pose restrictions on the 

origination of non-amortizing and 

negatively-amortizing loans. In view of 

these changes to the law and the 

outcome of its consumer testing, the 

Bureau solicited comments on whether 

to include the payment required to 

amortize ARMs that would become 

negatively amortizing as a result of an 

interest rate adjustment. 

Some industry commenters said that 

the statements regarding interest-only 

and negatively-amortizing ARMs should 

be disclosed instead of the proposed 

allocation information for these loans. 

See section-by-section analysis of 

§ 1026.20(d)(2)(iii). Several consumer 

groups commended the Bureau for 

requiring the amortization statements 

but recommended additional warning 

language for negatively-amortizing 

ARMs, which they characterized as 

dangerous. The Bureau believes that the 

statements regarding amortization are 

clear and succinct and that additional 

warning language is not needed. 

Moreover, the Bureau points out that 

other new mortgage rules more directly 

address the risks posed by nonamortizing mortgage products. 

The Bureau is modifying the wording 

of § 1026.20(d)(2)(vii) and comment 

20(d)(2)(vii)–1 to clarify that 

§ 1026.20(d) notices for ‘‘interest-only 

ARMs’’ as well as any other ARMs for 

which consumers are paying only 

interest, must include the statement 

discussed above regarding the 

amortization consequences of such 

payments. The Bureau also is modifying 

the language of § 1026.20(d)(2)(vii) to 

conform with the proposed language in 

comment 20(d)(2)(vii)–1 and the 

section-by-section analysis of the 

proposed rule regarding the 

amortization statements required for 

ARMs for which consumers pay only 

interest and for negatively-amortizing 

ARMs. The final rule requires 

§ 1026.20(d) notices to disclose, for 

consumers whose ARM payments 

consist of only interest, that their 

payment will not be allocated to pay 

loan principal and will not reduce the 

loan balance or, for negativelyamortizing ARMs, that the new payment 

will not be allocated to pay loan 

principal and will pay only part of the 

interest, thereby adding to the balance 

of the loan. No comments were received 

regarding the § 1026.20(d)(2)(vii) 

requirement to disclose the amount 

necessary to amortize negativelyamortizing ARMs. For these reasons and 

those stated in the proposed rule, the 

Bureau is adopting the rule and 

comments 20(d)(2)(vii)–1 and –2 with 

the addition of the amortization 

language discussed above. 

20(d)(2)(viii) 

Prepayment Penalty 

Proposed § 1026.20(d)(ix) would have 

required disclosure of the circumstances 

under which any prepayment penalty 

could be imposed, such as selling or 

refinancing the principal dwelling, the 

time period during which such penalty 

could apply, and the maximum dollar 

amount of the penalty. The proposed 

rule would have cross-referenced the 

definition of prepayment penalty in 

§ 1026.41(d)(7)(iv), the proposed rule for 

periodic statements. 

The Bureau reasoned that interest rate 

adjustments might cause payment shock 

or require consumers to pay their 

mortgage at a rate they might no longer 

be able to afford, prompting them to 

consider alternatives such as 

refinancing. To fully understand the 

implications of such actions, the Bureau 

stated that consumers should know 

whether prepayment penalties might 

apply. Under the proposed rule, such 

information would have included the 

maximum penalty in dollars that might 

apply and the time period during which 

the penalty might be imposed. The 

Bureau stated that the dollar amount of 

the penalty, as opposed to a percentage, 

would be more meaningful to 

consumers. 

The Bureau also proposed disclosure 

of any prepayment penalty in 

§ 1026.20(c) ARM payment change 

notices and in the periodic statements 

proposed by § 1026.41. Consumer 

testing of the periodic statement 

included a scenario in which a 

prepayment penalty applied. Most 

participants understood that a 

prepayment penalty applied if they paid 

off the balance of their loan early, but 

some participants were unclear whether 

it applied to the sale of the home, 

refinancing, or other alternative actions 

consumers could pursue in lieu of 

maintaining their adjustable-rate 

mortgages.102 For this reason, the 

Bureau proposed to clarify the 

circumstances giving rise to a 

prepayment penalty which creditors, 

assignees, and servicers must disclose to 

the consumer in the initial rate 

adjustment notice. The proposed forms 

included model language to alert 

consumers that a prepayment penalty 

might apply if they pay off their loan, 

refinance, or sell their home before the 

stated date. 

See the section-by-section analysis of 

§ 1026.20(c)(2)(vii) for a discussion of 

Dodd-Frank Act amendments to TILA 

that would significantly restrict a 

lender’s ability to impose prepayment 

penalties. In view of these changes to 

the law, the Bureau solicited comments 

on whether to include information 

regarding prepayment penalties in 

§ 1026.20(d). See the section-by-section 

analysis of § 1026.20(c)(2)(vii) for a 

discussion of comments received 

regarding the proposed prepayment 

penalty disclosure. 

The Bureau is adopting the rule, with 

significant modification from the 

proposed rule. The final rule is 

renumbered as § 1026.20(d)(2)(viii). In 

the final rule, in place of requiring 

disclosure of the maximum dollar 

amount of the penalty, the consumer is 

directed by the required disclosure to 

contact the servicer for additional 

information, including the maximum 

amount of the prepayment penalty. 

Comment 20(d)(2)(viii)–1 clarifies that 

the creditor, assignee, or servicer has the 

option of either deleting this field 

entirely from the § 1026.20(d) disclosure 

for consumers who do not have 

prepayment penalties or retaining the 

field and inserting a word such as 

‘‘None’’ after the prepayment penalty 

heading. Thus, the final rule retains 

information crucial for consumers to 

make decisions regarding whether or 

not to retain their ARMs in the face of 

an interest rate and payment increase 

while reducing the burden on industry 

by eliminating a field that was both 

dynamic and particularly difficult to 

calculate. The Bureau believes that 

encouraging consumers to contact the 

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10950 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

103See § 1026.32(b)(6)(i), published in a separate 

final rule (CFPB–2012–0037). NB: Certain 

provisions of the ATR definition apply specifically 

to FHA loans. 

104Macro Report, at viii. 

105The proposed § 1026.20(d) model forms stated: 

‘‘The following options may be possible (most are 

subject to lender approval).’’ 

servicer for the exact dollar amount of 

the maximum penalty or for other 

questions, rather than including that 

information in the disclosure, does not 

significantly compromise consumer 

protection because contacting the 

servicer should yield the most up-todate information as well as encourage 

contact with the servicer for consumers 

facing financial distress. The Bureau 

also notes that the periodic statement 

required by the final rule likewise does 

not contain specific information about 

any prepayment penalty other than its 

existence, as applicable. The Bureau 

also is changing the cross-reference for 

the definition of prepayment penalty 

from the periodic statement regulation 

to the ATR rule.103

The Bureau believes, for the reasons 

stated above and in the proposed rule, 

that information about the prepayment 

penalty is important for consumers to 

take into account when considering 

alternatives to an interest rate and 

payment increase. For this reason, the 

Bureau is adopting the final rule and 

comment 20(d)(2)(viii)–1 with the 

modifications set forth above. 

20(d)(2)(ix) 

Telephone Number of Creditor, 

Assignee, or Servicer 

Proposed § 1026.20(d)(2)(x) would 

have required disclosure of the 

telephone number of the creditor, 

assignee, or servicer for consumers to 

call if they anticipated having problems 

affording the new payment. The Bureau 

received no comments on this topic and 

is issuing the final rule as proposed, 

renumbered as § 1026.20(d)(2)(ix). 

20(d)(2)(x) 

Alternatives 

TILA section 128A mandates that the 

initial interest rate adjustment notices 

include a list of alternatives consumers 

may pursue before adjustment or reset 

and descriptions of the actions 

consumers must take to pursue these 

alternatives. These alternatives are 

refinancing, renegotiation of loan terms, 

payment forbearance, and preforeclosure sales. Proposed 

§ 1026.20(d)(2)(viii) would have 

required disclosure in § 1026.20(d) 

initial ARM interest rate notices of the 

four alternatives set forth in the statute. 

Proposed comment 

§ 1026.20(d)(2)(viii)–1 interpreted the 

rule to require simple, commonly used 

terms when possible in the model forms 

to describe the alternatives. 

The proposed model forms presented 

the list as possibilities for consumers 

seeking alternatives to the projected 

upcoming changes to their interest rate 

and payment. The proposed forms also 

explained that the alternatives may be 

possible and that most of them were 

subject to approval by the lender. All 

consumers tested in the first and second 

rounds of testing were able to identify 

the list of alternatives.104

In its proposal, the Bureau said that 

the list of alternatives generally and 

concisely described the actions 

consumers would have to take to pursue 

these alternatives, such as contacting 

their lender or another lender. The 

Bureau proposed to require disclosure 

of this concise list of alternatives in lieu 

of a more detailed account of actions 

consumers could take to maximize the 

effectiveness of the disclosure without 

weighing it down with information that 

may not add significant value. 

A national trade association and a 

non-bank servicer recommended 

eliminating the loss mitigation options 

in their entirety from the § 1026.20(d) 

disclosure. The trade association 

recommended that the Bureau exercise 

its exception authority to reverse the 

statutory mandate requiring inclusion of 

the loss mitigation options in the 

disclosure. In the alternative, the trade 

association recommended the Bureau 

remove proposed § 1026.20(d)(2)(viii) in 

favor of a provision encouraging 

consumers facing financial difficulty to 

contact the servicer to discuss possible 

loan modification and forbearance 

options or to permit servicers to include 

disclaimers about the accuracy of the 

required information. Chief among the 

reasons fueling the national trade 

association’s opposition to including 

proposed § 1026.20(d)(2)(viii) in the 

final rule was its concern that the 

conditional and disclaimer language 105

of the provision would be insufficient to 

prevent the false impression that some 

or all of these loss mitigation options 

would be available to consumers or that 

they could choose among the options. 

Both commenters suggested the 

proposed language could create a moral 

hazard encouraging consumers to 

default. The trade association concluded 

that the provision will encourage 

unnecessary defaults, unfulfilled 

expectations, and dissatisfaction with 

the servicer. The non-bank servicer also 

stated that it would be insulting to 

consumers to assume that the interest 

rate adjustment would cause financial 

distress. 

The Bureau declines to remove the 

loss mitigation options from the final 

rule. Disclosure of the loss mitigation 

options is expressly required by TILA 

section 128A(b)(4) and the Bureau 

believes presenting consumers with 

concrete and constructive possible 

responses to payment shock and 

financial distress, as set forth in the 

statute, could significantly benefit 

consumers. However, the Bureau 

believes that the proposed forms may 

have given unwarranted prominence to 

four alternatives. The Bureau believes 

that it is logical and may be beneficial 

to consumers to consolidate all of the 

loss mitigation information, including 

information about homeownership 

counselors and counselor organizations, 

State housing finance authorities, and 

the four alternatives, in one place in the 

disclosure. The Bureau is mindful that 

the information on alternatives will 

benefit only the portion of the 

consumers receiving the § 1026.20(d) 

disclosure that anticipate financial 

problems in the face of the higher 

payment that may occur with their first 

ARM adjustment. The Bureau also 

believes that the conditional and 

cautionary language the proposed model 

forms used in presenting those 

alternatives that require lender approval 

and that may not be available to 

consumers is sufficient and meets its 

goal of providing consumers with clear 

and succinct disclosures. The Bureau is 

adding emphasis to the conditional 

language in the final model forms by 

printing the word ‘‘may’’ in bold font. 

To enhance consumer understanding, 

the Bureau is modifying the final rule by 

requiring that the alternatives be 

expressed in simple and clear terms. 

Because of this addition to the final 

rule, the Bureau is removing proposed 

comment 20(d)(2)(viii)–1 interpreting 

the rule to require the non-technical 

language in the model forms describing 

the alternatives. 

For these reasons and the reasons 

articulated by the Bureau in the 

proposed rule, the Bureau is adopting 

§ 1026.20(d)(2)(viii) as the final rule, 

with some modification and 

renumbered as § 1026.20(d)(2)(x). As an 

alternative to prominently locating the 

four options in the middle of the 

disclosure, in the § 1026.20(d) model 

forms, the Bureau places them at the 

end of the disclosure, co-located with 

the other loss mitigation information 

disclosed in the forms, i.e., the 

homeownership counselor and State 

housing finance authority access 

information and contact information to 

call the servicer in case of anticipated 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10951 

106NB: The statutory language refers to ‘‘State 

housing finance authorities’’ but these entities may 

be named ‘‘authority’’ or ‘‘agency.’’ The Bureau 

views these terms as interchangeable for purposes 

of this discussion. 

107See § 1026.34(a)(5). 

108The list provided to consumers pursuant to 

this requirement must be obtained through a Bureau 

Web site or data made available by the Bureau or 

HUD. See § 1024.20(a)(1)(i). 

109The HUD list is available at http:// 

www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm and the 

HUD toll-free number is 800–569–4287. The Bureau 

list will be available by the effective date of this 

final rule at http://www.consumerfinance.gov/. 

problems paying at the estimated new 

rate. 

20(d)(2)(xi) 

Contact Information for Government 

Agencies and Counseling Agencies or 

Programs 

State Housing Finance Authorities 

TILA section 128A(b)(6) requires the 

initial interest rate adjustment notices to 

include the mailing and internet 

addresses, and telephone number of the 

State housing finance authority,106 as 

defined in section 1301 of Financial 

Institutions Reform, Recovery, and 

Enforcement Act of 1989 (FIRREA), for 

the State in which the consumer resides. 

Proposed § 1026.20(d)(2)(xi) would have 

implemented this statutory mandate by 

requiring inclusion of this information 

in the initial interest rate adjustment 

notices. Two other mortgage servicing 

rulemakings proposed by the Bureau, 

the periodic statement, see below, and 

the early intervention for delinquent 

borrowers in the 2012 RESPA Servicing 

Proposal, also would have required 

contact information for the State 

housing finance authority. However, 

those proposals would have required 

the contact information for the State in 

which the property is located rather 

than in which the consumer resides, 

because the scope of those proposed 

rules is not limited to a consumer’s 

principal dwelling. The Bureau sought 

comment on how to address any 

compliance difficulties posed by this 

inconsistency. The Bureau did not 

believe this inconsistency of language 

would be problematic because, 

logically, the consumer’s principal 

dwelling would be located in the State 

in which the property is located. 

Commenters addressing this 

inconsistency recommended that the 

Bureau provide the contact information 

for the State in which the property is 

located to maintain consistency among 

the Regulation Z and Regulation X 

mortgage rules. The Bureau agrees with 

this recommendation because, as stated 

above, TILA section 128A applies to 

consumer credit transactions secured by 

the consumer’s principal residence, 

such that the State in which the 

property is located and the consumer’s 

State of residence are the same. 

However, this issue of consistency is 

mooted by the Bureau’s decision to use 

its exception authority to issue the final 

rule requiring § 1026.20(d) notices to 

direct consumers to a Bureau Web site 

from which they can locate contact 

information for the appropriate State 

housing finance authority, in place of 

including the specific contact 

information in the notice itself. See the 

Legal Authority discussion below for 

the bases for this modification of the 

rule. 

Those who commented on the 

statutory requirement to include contact 

information for State housing finance 

authorities recommended that the 

Bureau issue the final rule removing 

this information entirely from the 

§ 1026.20(d) notice. Alternatively, 

commenters recommended (1) 

modifying the model forms to clarify 

that these entities may not provide 

homeownership counseling or (2) 

directing consumers to a Web site where 

they could find contact information for 

the appropriate State housing finance 

authority. 

State housing finance authorities 

(SHFAs) and the organizations 

representing them uniformly 

recommended against the statutory 

mandate to include SHFA contact 

information in the § 1026.20(d) notice. 

While always willing to help distressed 

homeowners, they said, not all SHFAs 

provide counseling and they expressed 

concern that the referral might misdirect 

consumers away from entities more 

likely to provide the appropriate 

assistance. SHFAs voiced concern that 

the increase in consumer inquiries 

expected as a result of including their 

contact information in the § 1026.20(d) 

notices would tax their already limited 

resources. Industry commenters pointed 

out the cost burden of this dynamic 

field, which would require 

customization of the form by State and 

constant monitoring of changes to this 

information. 

The Bureau believes that issuing its 

final rule requiring § 1026.20(d) notices 

to refer consumers to the Bureau Web 

site to find contact information for the 

appropriate SHFA, rather than 

including specific contact information 

in the disclosure itself, does not 

compromise consumer protection. The 

unanimity of SHFA commenters and 

their representatives favoring 

elimination of SHFA contact 

information from the notice provides 

sufficient proof to the Bureau that 

consumer protection would be better 

served by this modification of the 

proposed rule. The Bureau also notes 

that no consumer advocacy 

organizations commented on this issue 

and that the final rule resolves industry 

concerns on this topic. 

Counseling Agencies or Programs 

TILA section 128A also mandates that 

the initial interest rate adjustment 

notices include the names, mailing and 

internet addresses, and telephone 

numbers of counseling agencies or 

programs reasonably available to the 

consumer that have been certified or 

approved and made publicly available 

by HUD or a State housing finance 

authority. The 2013 HOEPA Final Rule, 

which implements the Dodd-Frank Act 

protections for ‘‘high-cost’’ mortgage 

loans, requires, among other things, that 

consumers get homeownership 

counselors and counseling organizations 

prior to obtaining a high-cost 

mortgage.107 It also implements other 

housing-counseling-related 

requirements unrelated to HOEPA that 

are included in the Dodd-Frank Act, 

such as requiring lenders to provide a 

list of homeownership counselors to 

applicants for federally related mortgage 

loans.108

The Bureau proposed the alternative 

approach, with regard to the initial 

ARM interest rate adjustment notices, of 

using its exception authority to require 

creditors, assignees, and servicers 

simply to provide the Web site address 

and telephone number to access either 

the Bureau list or the HUD list of 

homeownership counselors and 

counseling organizations instead of 

requiring contact information for a list 

of specific counseling agencies or 

programs.109 For the reasons set forth in 

the proposal and below, the Bureau is 

adopting this proposed measure with 

regard to the Web site access to 

homeownership counselor resources. In 

addition, the Bureau is issuing the final 

rule modifying the proposed 

requirement to include both HUD and 

Bureau telephone numbers to access 

homeownership counselor information 

in favor of requiring disclosure only of 

the HUD telephone number because the 

Bureau believes the HUD telephone 

number provides adequate access to 

approved counseling resources. 

The ARM notice required by proposed 

§ 1026.20(d) contains, in a limited 

amount of space, a significant amount of 

important technical information about 

the upcoming initial interest rate 

adjustment of the consumer’s ARM and 

the potential implications of that 

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10952 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

adjustment. Including too much 

information could overwhelm 

consumers and minimize the value of 

the other information contained in the 

notice. Also, not all consumers would 

benefit from the counselor information, 

although it would provide an important 

benefit for those consumers who face 

financial difficulties if their initial 

interest rate adjustment may cause their 

mortgage payments to significantly 

increase. Finally, importing updated 

information from the Bureau or HUD 

Web site would involve more 

programming and upkeep burden than 

simply listing one of the agencies’ Web 

sites and the HUD telephone number. 

Providing consumers with the Web 

site address for either the Bureau or 

HUD list of homeownership counselors 

and counseling organization and the 

HUD telephone number would 

streamline the disclosure and present 

clear and concise information for the 

consumer to use. Directing consumers to 

the actual list would allow them to 

choose a conveniently-located program 

or agency and find other programs or 

agencies if those contacted initially 

could not help the consumer. The 

Bureau sought comment on whether this 

proposal struck an appropriate balance, 

and on the benefits and burdens to both 

consumers and industry of requiring 

inclusion of a list of several individual 

homeownership counselors in the initial 

ARM interest rate adjustment notice. 

Industry commenters uniformly 

supported the provision to provide 

information for consumers on how to 

access homeownership counselor 

information rather than requiring 

inclusion of the contact information for 

specific homeownership counselors in 

the § 1026.20(d) disclosure and the 

Bureau received no comments from 

other sectors. A few servicers stated that 

a distressed consumer’s first action 

should be to call the servicer and, in 

response, the Bureau notes that the first 

entry in the loss mitigation portion of 

the model form encourages consumers 

to call their servicer. 

The Bureau is adopting the final rule 

as proposed with regard to 

homeownership counselors and 

counseling organizations, except that it 

also is removing the requirement to 

include both a HUD and Bureau 

telephone number to access contact 

information for homeownership 

counselors and counseling information 

in favor of requiring disclosure only of 

the HUD telephone number. The Bureau 

believes that its approach regarding the 

homeownership counselor disclosures 

appropriately balances consumer and 

industry interests. 

Legal Authority 

The Bureau is relying on its authority 

under TILA sections 105(a) and (f) and 

Dodd-Frank Act section 1405(b) to 

exempt creditors, assignees, and 

servicers from the requirement in TILA 

section 128A to include contact 

information for SHFAs and specific 

government-certified counseling 

agencies or programs reasonably 

available to the consumer in the initial 

ARM interest rate adjustment notice. 

TILA section 105(a) and Dodd-Frank 

Act section 1405(b) also authorize the 

Bureau to instead require that the initial 

ARM interest rate adjustment notice 

contain information directing 

consumers to the Bureau list or HUD list 

of homeownership counselors and 

counseling organizations, the HUD 

telephone number, and the Bureau Web 

site from which consumers can locate 

the appropriate State housing finance 

authority. For the reasons discussed 

above, the Bureau believes that the 

exemption and addition is necessary 

and proper under TILA section 105(a) 

both to effectuate the purposes of 

TILA—to promote the informed use of 

credit and protect consumers against 

inaccurate and unfair credit billing 

practices—and to facilitate compliance. 

Moreover, the Bureau believes, in light 

of the factors in TILA section 105(f), that 

disclosure in the § 1026.20(d) notice of 

the contact information for SHFAs and 

government-certified counseling 

agencies or programs reasonably 

available to the consumer specified in 

TILA section 128A would not provide a 

meaningful benefit to consumers. 

Specifically, the Bureau considers that 

the exemption is proper irrespective of 

the amount of the loan and the status of 

the consumer (including related 

financial arrangements, financial 

sophistication, and the importance to 

the consumer of the loan). Moreover, in 

the estimation of the Bureau, the 

exemptions would simplify the initial 

ARM adjustment notice, provide 

consumers with the appropriate 

information to locate homeownership 

counselors and counseling 

organizations, if needed, and improve 

the information provided to the 

consumer, thus furthering the consumer 

protection purposes of TILA. In 

addition, consistent with section 

1405(b) of the Dodd-Frank Act, the 

Bureau believes that modification of the 

requirements in TILA section 128A 

would improve consumer awareness 

and understanding and is in the interest 

of consumers and in the public interest. 

20(d)(3) Format 

Initial Rate Adjustment Disclosures 

See the section-by-section analysis of 

§ 1026.17(a)(1) above for a discussion of 

the form requirements governing 

§ 1026.20(d). The Bureau received no 

comments regarding its proposed 

changes to § 1026.17(a)(1) regarding 

form requirements governing 

§ 1026.20(d), but it did receive 

significant response to the proposed 

implementation of the ‘‘separate and 

distinct’’ standard. In the final rule, the 

Bureau interprets the ‘‘separate and 

distinct’’ standard as permitting the 

initial interest rate adjustment notices to 

be provided in the same envelope or 

email with other servicer material, but 

only if it is a stand-alone document. See 

further discussion in the section-bysection analysis of § 1026.20(d) above. 

The Bureau is issuing § 1026.17(a) with 

conforming changes. See the discussion 

in the section-by-section analysis of 

§ 1026.17(c). See the section-by-section 

analysis of § 1026.20(c)(3) above for a 

discussion regarding ARM disclosures 

in languages other than English. 

Legal Authority 

In addition, as described below, 

§ 1026.20(d)(3) imposes additional form 

requirements for initial ARM 

adjustment notices. For the reasons 

described below, these requirements are 

authorized under TILA section 105(a) 

and Dodd-Frank Act sections 1032(a) 

and 1405(b). As discussed in the 

section-by-section analysis of each of 

the sections of § 1026.20(d)(3), the 

Bureau believes, consistent with TILA 

section 105(a), that the formatting 

requirements are necessary and proper 

to effectuate the purposes of TILA, to 

assure a meaningful disclosure of credit 

terms, to avoid the uninformed use of 

credit, and to protect consumers against 

inaccurate and unfair credit billing 

practices. Further, the Bureau believes, 

consistent with Dodd-Frank Act section 

1032(a), that the formatting 

requirements ensure that the features of 

the ARM loans covered by § 1026.20(d) 

are fully, accurately, and effectively 

disclosed to consumers in a manner that 

permits them to understand the costs, 

benefits, and risks associated with such 

loans, in light of their individual facts 

and circumstances. Moreover, 

consistent with Dodd-Frank Act section 

1405(b), the Bureau believes that 

modification of the disclosure 

requirements of TILA section 128A(b) to 

require the format discussed below will 

improve consumer awareness and 

understanding of residential mortgage 

loans transactions involving ARMs, and 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10953 

110Macro Report, at vii. 

is thus in the interest of consumers and 

in the public interest. 

20(d)(3)(i) 

All Disclosures in Tabular Form, Except 

the Date 

Proposed § 1026.20(d)(3)(i) would 

have required that, except for the date 

of the notice, the initial ARM 

adjustment disclosures be provided in 

the form of a table and in the same order 

as, and with headings and format 

substantially similar to, Forms H– 

4(D)(3) and (4) in appendix H to subpart 

C for initial interest rate adjustments. 

See the section-by-section analysis of 

§ 1026.20(c)(3)(i) for a discussion of the 

rationale in the proposed rule for 

providing the § 1026.20(c) and (d) 

disclosures in tabular form to 

consumers and of the comments the 

Bureau received regarding the required 

tabular format. The Bureau’s response to 

these comments is two-fold. First, the 

proposed rule’s requirement that 

§ 1026.20(d) disclosures be provided to 

consumers ‘‘in the form of the table and 

in the same order as, and with headings 

and format substantially similar to’’ the 

proposed model forms is consistent 

with established standards found 

throughout Regulation Z requiring 

tabular formatting as well as other 

conventions. For example, 

§ 1026.6(b)(1), entitled ‘‘Form of 

disclosures; tabular format for open-end 

(not home-secured) plans,’’ requires 

creditors to provide account-opening 

disclosures ‘‘in the form of a table with 

headings, content, and format 

substantially similar to’’ the tables in a 

particular model form. Moreover, 

Regulation Z’s Appendices G and H— 

Open-End and Closed-End Model Forms 

and Clauses sets forth the permissible 

changes to model forms, including the 

§ 1026.20(d) model forms. Thus, the 

proposed rule does not depart from 

established Regulation Z standards and 

does not violate TILA. 

Second, the proposed language 

referred to by commenters was not 

intended to strait-jacket creditors, 

assignees, and servicers into language 

inapplicable to non-standard customer 

situations and loan products. The 

‘‘substantially similar’’ language was 

intended to allow disclosure providers 

the flexibility to develop, for example, 

forms that may be either one- or twosided and that may, but need not, 

feature reverse text data fields. 

For these reasons and those 

articulated in the proposed rule, the 

Bureau is adopting 1026.20(d)(3)(i), (ii), 

and (iii) and comment 20(d)(3)(i)–1. 

While, as stated above, the formatting 

conventions in the final § 1026.20(d) 

disclosures do not depart from standard 

Regulation Z format requirements, the 

Bureau has added comment 20(d)(3)(i)– 

1 clarifying that creditors, assignees, 

and servicers may modify the 

§ 1026.20(d) disclosures to account for 

certain circumstances or transactions 

that may not be addressed in the final 

rule or forms. Also, the final rule 

removes § 1026.20(d) model and sample 

forms from the Regulation Z provision 

prohibiting formatting alterations. See 

Appendices G and H—Open-End and 

Closed-End Model Forms and Clauses. 

20(d)(3)(ii) 

Format of Date of Disclosure 

Proposed § 1026.20(d)(3)(ii) would 

have required that the date of the 

disclosure appear outside of and above 

the table required by § 1026.20(d)(3)(i). 

As discussed above with respect to 

paragraph 20(d)(2)(i), the date would 

have been segregated because it is not 

information specific to the consumer’s 

adjustable-rate mortgage. Having 

received no comments on this topic, the 

Bureau is adopting the rule as proposed. 

20(d)(3)(iii) 

Format of Interest Rate and Payment 

Table 

Proposed § 1026.20(d)(3)(iii) would 

have required tabular format for initial 

ARM interest rate adjustment notices 

for, among other things, interest rates, 

payments, and the allocation of 

payments for loans that are interest-only 

or are negatively amortizing. This table 

would have been located within the 

table proposed by § 1026.20(d)(3)(i). 

This table would have been 

substantially similar to the one tested by 

the Board for its 2009 Closed-End 

Proposal to revise § 1026.20(c). The 

Bureau’s proposal would have required 

the table to follow the same order as, 

and have headings and format 

substantially similar to, Forms H– 

4(D)(3) and (4) in appendix H of subpart 

C. 

Disclosing the current interest rate 

and payment in the same table allows 

consumers to readily compare them 

with the estimated or actual adjusted 

rate and new payment. Consumer 

testing revealed that nearly all 

participants were readily able to 

identify and understand the table and 

its contents.110 The estimated or actual 

new interest rate and payment and date 

the first new payment is due is key 

information the consumer must know to 

commence payment at the new rate. For 

these reasons, the Bureau proposed 

locating this information prominently in 

the disclosure. 

The Bureau is issuing the final rule as 

proposed in § 1026.20(d)(3)(iii). See the 

section-by-section analysis of 

§ 1026.20(c)(iii) for a discussion of 

comments received and the Bureau’s 

rationale for the proposed format in the 

interest rate and payment table and 

changes made in the final rule. 

Section 1026.36 Prohibited Acts or 

Practices in Connection With Credit 

Secured by a Dwelling 

36(c) Servicing Practices 

Section 1464 of the Dodd-Frank Act 

generally codified provisions in existing 

Regulation Z with respect to the 

crediting of consumer payments and 

providing payoff statements. The 

Bureau proposed to implement these 

statutory requirements through 

relatively minor changes to Regulation Z 

as discussed below. Pursuant to the 

Dodd-Frank Act and current 

§ 1026.36(c), a servicer must promptly 

credit payments, must not engage in the 

pyramiding of late fees, and must 

provide a consumer with a payoff 

statement at the consumer’s request. 

The Bureau proposed amending 

Regulation Z to implement the new 

statutory requirements, and to address 

the related issue of the handling of 

partial payments. 

36(c)(1)(i) Periodic Payments 

Section 1464(a) of the Dodd-Frank Act 

established new TILA section 129F(a), 

which essentially codified existing 

Regulation Z § 1026.36(c)(1)(i) with 

regard to prompt crediting of mortgage 

loan payments. The statute and the 

existing regulation both provide 

generally that no servicer shall fail to 

credit a payment to the consumer’s loan 

account as of the date of receipt, except 

when a delay in crediting does not 

result in any charge to the consumer or 

in the reporting of negative information 

to a consumer reporting agency. 

Proposed § 1026.36(c)(1)(i) would 

have required a servicer to promptly 

credit a ‘‘full contractual payment.’’ A 

full contractual payment would have 

been defined to mean the amount owed 

for principal, interest, and escrow (if 

applicable), but not late fees. The 

Bureau engaged in outreach and found 

that many servicers already apply 

payments that cover principal, interest, 

and escrow (if applicable) without 

deducting late fees. 

In general, commenters supported the 

prompt crediting of full payments; 

however commenters expressed 

concerns over the definition of a full 

payment and requested clarification 

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10954 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

111See § 1026.41 and comment 1026.41(c)–2. 

regarding the implication of this rule in 

certain circumstances. 

Several industry commenters and one 

State Attorney General’s office 

commented that a definition of ‘‘full 

contractual payment’’ that excluded late 

fees would encourage consumers to 

ignore payment of late fees, would 

purport to redefine the terms of the 

underlying security instrument, and 

would potentially impact the servicer’s 

ability to collect fees to which they were 

contractually entitled. An industry 

commenter indicated that the proposed 

rule reflected industry practice and was 

not necessary, whereas another 

suggested that if late fees were not 

included in the definition of full 

contractual payment, there should be a 

message reminding consumers of their 

late fee obligation. 

Several commenters also sought 

clarification regarding the implications 

of the requirement in certain 

circumstances. Specifically, a consumer 

advocate commenter requested 

clarification regarding the impact on 

non-payment of escrowed amounts for 

force-placed insurance and property 

taxes. Several industry commenters 

requested clarification regarding the 

application of the rule when a mortgage 

loan has been accelerated or is in 

foreclosure, and urged an exemption for 

such scenarios. In addition, the Bureau 

received one comment expressing 

concern about posting payments on 

weekends, and one comment requesting 

that payments only be posted on the 

same business day, not the same 

calendar day. Finally, a number of 

community banks, credit unions, small 

servicers and their trade associations 

requested an exemption for small 

servicers from all provisions of the 

proposed rules. 

As stated in the proposal, the Bureau 

believes that if a consumer submits 

sufficient funds to cover principal, 

interest and escrow, those funds should 

be applied regardless of whether there 

are outstanding late fees. The rule was 

not intended to redefine existing 

contractual terms of the underlying 

security. While servicers must apply full 

payments that are sufficient to cover 

principal, interest and escrow, servicers 

may still charge and collect late fees if 

such payments are not timely made. The 

Bureau initially proposed to define the 

amount due in any period for principal, 

interest, and escrow as a ‘‘full 

contractual payment’’ to reflect the 

amount due in a period pursuant to the 

contractual obligation. However, in light 

of the concern that the regulation may 

be interpreted as redefining a 

consumer’s contractual obligation, the 

Bureau is adopting instead the term 

‘‘periodic payment’’ in place of ‘‘full 

contractual payment’’ to refer to the 

amount owed by the consumer for 

principal, interest, and escrow during 

any billing cycle. Thus, if a consumer 

submits an amount sufficient to 

constitute a periodic payment (that is, 

enough to cover the amounts due for 

principal, interest, and escrow), that 

payment must be promptly credited to 

a consumer’s account. 

Because the definition of ‘‘periodic 

payment’’ is intended to reflect the 

consumer’s contractual obligation, to 

the extent a consumer’s mortgage loan 

has been accelerated (such that the 

periodic payment constitutes the total 

amount owed for all principal and 

interest), or that certain obligations for 

force-placed insurance or delinquent 

taxes have been paid through the escrow 

account, those amounts may be 

appropriately accounted for within this 

definition of a periodic payment. With 

regard to defining the periodic payment, 

the Bureau believes it is appropriate to 

include amounts owed for escrow in the 

periodic payment. The 2013 RESPA 

Servicing Final Rule imposes greater 

requirements on servicers with respect 

to advances for maintaining insurance 

for escrowed borrowers and the Bureau 

believes it is appropriate and consistent 

with most security instruments to 

include escrow in the periodic payment. 

The Bureau does not believe the rule 

will prevent collection of late fees or 

impose operational challenges on 

servicers regarding the timing for 

crediting payments. Although a servicer 

may not delay crediting of a payment 

until a late fee has been paid, nothing 

in the rule prevents a servicer from 

charging and collecting a late fee where 

appropriate. The Bureau does not 

believe it is appropriate to mandate a 

statement to the consumer regarding the 

consumer’s obligation to pay a late fee; 

however, a servicer may undertake 

appropriate actions, including 

potentially through a message on the 

periodic statement, to collect late 

fees.111 With respect to comments 

regarding operational difficulties of 

crediting payments on a specific day, 

the Bureau observes that payment must 

be credited on the day of receipt except 

when a delay in crediting does not 

result in any charge to the consumer or 

in the reporting of negative information 

to a consumer reporting agency. The 

Bureau believes this allows servicers 

sufficient flexibility because, if it is 

operationally infeasible to post a 

payment on the day received, payments 

may be processed on a later day so long 

as that later posting does not result in 

a charge to the consumer or in the 

reporting of negative information to a 

consumer reporting agency. 

Accordingly, the Bureau finalizes the 

rule as proposed, with a minor 

adjustment to replace the term ‘‘full 

contractual payment’’ with the term 

‘‘periodic payment.’’ Additionally, to 

dispel any impression that existing 

comment 36(c)(1)(i) 2 is inconsistent 

with the final rule, the Bureau is 

amending the comment to clarify that it 

concerns the method in which 

payments are credited. 

Small Servicers 

Finally, the Bureau does not believe 

an exemption for small servicers from 

the prompt crediting requirement is 

appropriate. Small servicers are already 

required to promptly credit payments 

under the current requirements of 

Regulation Z. Outreach with small 

servicers indicates that such servicers 

are generally already in compliance 

with the prompt crediting requirements. 

Further, in the course of the Bureau’s 

outreach efforts, small servicers told the 

Bureau that they do not use suspense 

accounts, choosing instead to credit 

partial payments or return the 

payments. These practices continue to 

be allowed, as clarified in comment 

36(c)(1)(ii)–1. 

36(c)(1)(ii) Partial Payments 

Section 1464 of the Dodd-Frank Act 

and existing Regulation Z do not define 

what constitutes a ‘‘payment’’ for 

purposes of the prompt crediting 

requirement. Outreach to consumer and 

industry stakeholders revealed that 

partial payments are currently handled 

in a variety of ways: Some servicers do 

not accept partial payments, some 

servicers apply partial payments, and 

some servicers send partial payments to 

a suspense or unapplied funds account. 

Previously, there were no Federal 

regulations that governed such 

accounts; thus, the Bureau proposed to 

address partial payments in proposed 

§ 1026.36(c)(1)(ii). 

Proposed § 1026.36(c)(1)(ii) provided 

specific rules regarding the handling of 

partial payments and suspense 

accounts. New paragraph 36(c)(1)(ii) 

would have required, consistent with 

the proposed periodic statement 

requirements in § 1026.41 discussed 

below, that if a servicer holds a partial 

payment, meaning any payment less 

than a full contractual payment, in a 

suspense or unapplied funds account, 

the servicer must disclose on the 

periodic statement the amount of funds 

held in such account. Additionally, 

proposed § 1026.36(c)(1)(ii) would have 

provided that if a servicer were to hold 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10955 

112See comment 36(c)(1)(ii)–1: A servicer may 

take any of the following actions when a partial 

payment is received: They may credit the partial 

payment on receipt, they may hold the payment in 

a suspense or unapplied funds account, or they may 

return the payment. 

a partial payment in a suspense or 

unapplied funds account, once there are 

sufficient funds in the account to cover 

a full contractual payment, the servicer 

would have had to apply those funds to 

the oldest outstanding payment due. 

The proposed regulation would have 

left servicers significant flexibility in the 

handling of partial payments in 

accordance with contractual terms and 

other applicable law, for instance by 

rejecting the payment, crediting it 

immediately, or holding it in a suspense 

account. However, the proposed rule 

also would have ensured greater 

consistency in the handling of suspense 

accounts by requiring certain 

procedures around partial payments. 

The Bureau believed this proposed 

approach would have clarified servicers’ 

obligations in processing both full 

payments and partial payments, as well 

as ensured that all payments would be 

properly applied. The proposed 

disclosures would have helped 

consumers understand that their partial 

payments are being held in a suspense 

account rather than having been 

applied, as well as when those partial 

payments would be applied. 

Additionally, requiring application 

when a full payment accumulates 

would have provided protection to 

consumers, as well as reduced the 

outstanding principal balance on certain 

consumer loans. 

The majority of commenters 

appreciated the rule’s flexibility in 

handling partial payments; however, 

some consumer-advocate commenters 

felt that all payments, including partial 

payments, should be immediately 

credited to the consumer’s account. Two 

of these commenters felt this was 

particularly important in the case of 

daily accrual loans. Comments also 

revealed there was some confusion 

about the proposed rule; in particular, 

there was confusion about whether the 

use of suspense accounts would have 

been permitted or required. 

Consumer advocate commenters 

requested that the Bureau require 

further procedures for the handling of 

partial payments to avoid arbitrariness 

in the handling and crediting of these 

payments, and to ensure there is no 

ambiguity or uncertainty for either 

consumers or institutions. The Bureau 

also received comments directly 

addressing the question of whether, if 

payments are returned (rather than 

placed in a suspense account or 

applied), they must be returned within 

a specific period of time. Some 

commenters suggested a specific period 

of time, and one commenter felt that 

further regulation on this topic is not 

required. Additionally, the Bureau 

received one comment requesting 

clarification on how the periodic 

statement exemptions would affect the 

partial payments disclosure, one 

comment requesting confirmation that 

the new provisions addressing suspense 

accounts would not be in conflict with 

existing Regulation Z § 226.21, and 

several comments requesting an 

exemption from the prompt crediting 

provisions when a consumer is in 

bankruptcy. 

Finally, commenters disagreed on the 

provision requiring application to the 

oldest outstanding delinquency—some 

agreed with this provision because they 

felt it would advance the date of 

delinquency one cycle, while other 

consumer advocate commenters felt it 

would be more consumer-friendly to 

mandate that servicers apply the 

payment to the most recent payment 

due. These commenters also stated the 

proposed provision would conflict with 

certain State laws. 

The Bureau is adopting as the final 

rule all the proposed provisions 

addressing partial payments, except for 

the clause requiring to which 

outstanding payment an accumulated 

complete periodic payment must be 

applied. The Bureau is clarifying in the 

final rule that if sufficient funds accrue 

in any suspense or unapplied funds 

account to cover a periodic payment, 

such funds must be treated as a periodic 

payment received. 

The Bureau has carefully considered 

the comments suggesting that all 

payments, including partial payments 

and particularly partial payments for 

daily accrual loans, should be promptly 

credited. The Bureau recognizes that the 

statutory language does not address 

partial payments, but the Bureau also 

notes that the statute codified existing 

language from Regulation Z, which has 

been widely interpreted to allow partial 

payments to be sent to suspense 

accounts. 

The Bureau also considered the 

burden that requiring prompt crediting 

of partial payments could impose on 

servicers. Requiring servicers to credit 

every payment that a consumer sends in 

during the month could create problems 

in payment processing operations. 

Additionally, this could create immense 

accounting difficulties; for example, if a 

consumer were to send in a few dollars 

the servicer would have to determine 

the proper allocation of those funds. 

Finally, this would create complications 

for servicers when consumers are 

severely delinquent. Certain State laws 

require a period of time between the last 

accepted payment and foreclosure. 

Constant application of partial 

payments could prevent servicers from 

being able to foreclose on property, even 

when such foreclosure would otherwise 

be appropriate. The Bureau also 

considered the potential benefit to 

consumers. While the Bureau agrees 

that holding payments in a suspense 

account rather than applying them 

could increase the cost of interest for 

daily interest accrual loans, the Bureau 

notes that this cost to consumers is 

limited due to the requirement to apply 

the funds once a full payment has 

accrued. Thus, requiring application of 

partial payments would provide at best 

only a limited benefit to consumers. In 

light of the small benefit to consumers, 

and larger burden on servicers, the 

Bureau does not believe it is appropriate 

to require prompt application of partial 

payments. The Bureau notes that while 

the final rule allows servicers to place 

partial payments received into a 

suspense account, it does not require 

servicers to place partial payments in 

suspense accounts.112 The Bureau 

believes that suspense accounts are best 

addressed by allowing services 

discretion as to whether to use such 

accounts but requiring that funds held 

in any such account be disclosed in the 

periodic statement, and, when sufficient 

funds accrue for a full payment, that 

they be promptly applied, as in the 

proposed rule. The Bureau believes 

many of the more detailed aspects of 

suspense accounts are already 

addressed by existing law and contracts 

(for example, the Bureau observes that 

the order of application of funds is often 

determined by the contract between the 

parties), and does not believe it is 

necessary to impose additional 

regulation on suspense accounts at this 

time. 

In response to the request for 

clarification as to how the periodic 

statement exemptions (see § 1026.41(e)) 

affect the partial payments disclosure, 

the Bureau notes that, under both 

proposed and final 

§ 1026.36(c)(1)(ii)(A), the disclosure is 

required only ‘‘if a periodic statement is 

required.’’ Thus, servicers not required 

to send periodic statements are exempt 

from the provision requiring disclosure 

of the amount of funds held in the 

suspense account on the periodic 

statement. Further, the Bureau does not 

believe there would be a conflict 

between the provisions addressing 

suspense accounts and existing 

§ 1026.21. Section 1026.21 requires the 

creditor to take certain actions when a 

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10956 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

113The statute requires a payoff balance be 

provided in response to a borrower’s request, the 

Bureau interprets ‘‘borrower’’ (a term not used 

credit balance in excess of $1 is created. 

Because funds are only sent to a 

suspense account when a partial 

payment is received (and funds must be 

applied when a full payment occurs), a 

suspense account would not be used if 

there was a credit balance. Thus, the 

Bureau believes there is no conflict 

between these provisions. 

The Bureau believes the prompt 

crediting provisions should remain in 

effect, even when a consumer is in a 

bankruptcy or trial modification 

scenario. While the Bureau understands 

the requirement that the pre-petition 

and post-petition accounts must be kept 

separate during a bankruptcy, the 

Bureau believes that if sufficient funds 

accrue in either account to make a 

periodic payment due, those funds 

should be applied. Further, the Bureau 

believes that consumers in the 

bankruptcy scenario should have full 

payments promptly credited. Similarly, 

the Bureau believes that if a consumer 

makes a payment sufficient to cover the 

principal, interest and escrow due 

under a trial modification plan, these 

funds should be applied. If a consumer 

were to make a payment insufficient to 

cover these expenses, the servicer 

would also have the options of returning 

the payment, or sending the payment to 

a suspense account. 

The Bureau carefully considered the 

concerns about the requirement that a 

full payment must be applied to the 

oldest outstanding delinquency may 

cause conflict with certain State law 

requirements. This provision was 

intended to prevent extended 

delinquencies and collection of multiple 

late fees. However, further research has 

shown this problem is mitigated 

through other means, including the 

prohibition on pyramiding of late fees. 

Further, the Bureau has become aware 

that requiring application to the oldest 

outstanding delinquency may indeed 

conflict with State law. In light of these 

factors, the Bureau believes this 

provision would provide only minimal 

benefits; thus the Bureau is removing 

the language that would have required 

to which outstanding time period full 

payments would have been applied be 

applied. Thus, § 1026.36(c)(1)(ii) is 

adopted as proposed, except for the 

provision requiring to which 

outstanding payment an accumulated 

periodic payment must be applied. 

Legal Authority 

The required disclosures on the 

periodic statement are authorized under 

TILA section 128(f), which requires 

creditors, assignees, and servicers to 

send statements for each billing cycle 

that includes certain information, 

including ‘‘[s]uch other information as 

the Bureau may prescribe in 

regulations.’’ 

In addition, the Bureau interprets the 

language in TILA section 129F(a), that 

servicers must ‘‘credit’’ payments as of 

the date of receipt, except when a delay 

in crediting does not result in ‘‘any 

charge’’ to the consumer to authorize 

the requirement that partial payments 

held in suspense accounts be credited 

when a full periodic payment 

accumulates. Failure to credit such 

payments would result in a charge to 

the consumer by extending the duration 

of the delinquency. To the extent not 

required under TILA section 129F(a), 

the Bureau believes this requirement 

regarding crediting of funds is 

authorized under TILA section 105(a). 

As explained above, the Bureau believes 

the requirement is necessary and proper 

to effectuate the purpose of TILA to 

protect consumers against inaccurate 

and unfair credit billing practices by 

ensuring that funds held in a suspense 

account are promptly applied when 

sufficient funds accumulate in such an 

account to cover a full periodic 

payment. 

36(c)(1)(iii) Non-Conforming Payments 

TILA section 129F(b) codified the 

treatment of non-conforming payments 

in current § 1026.36(c)(2). The proposal 

did not make any substantive changes to 

this provision, but redesignated the 

section as new § 1026.36(c)(1)(iii). 

The Bureau noted that payments held 

in a suspense or unapplied funds 

account, as addressed in proposed 

§ 1026.36(c)(1)(ii), discussed above, 

would not be considered to have been 

‘‘accepted’’ by the servicer. Thus, under 

the proposal, partial payments retained 

in suspense or unapplied funds 

accounts would be treated as payments 

that have not been accepted and thus 

are not subject to § 1026.36(c)(1)(iii); as 

opposed to non-conforming payments 

that have been accepted that are subject 

to proposed § 1026.36(c)(1)(iii), and thus 

must be credited within five days of 

receipt. 

Two commenters expressed concern 

about non-conforming payments, stating 

that prompt crediting should be 

contingent on consumers making 

payments to the servicer’s proper 

address or through authorized channels 

(e.g., payment by phone, online or 

ACH). The Bureau agrees, but believes 

this concern is adequately addressed by 

the existing provisions on nonconforming payments, which remain 

unchanged. The final rule adopts the 

provisions on non-conforming payments 

as proposed. 

36(c)(2) No Pyramiding of Late Fees 

The proposed rule would have 

prohibited a servicer from assessing a 

late fee or delinquency charge for a 

payment if (1) such a fee or charge is 

attributable solely to failure of the 

consumer to pay a late fee or 

delinquency charge on an earlier 

payment; and (2) the payment is 

otherwise a periodic payment received 

on the due date, or within any 

applicable grace period. This 

requirement is substantially similar to 

existing paragraph 36(c)(1)(ii) and the 

Bureau did not propose any substantive 

changes to the existing requirement but 

rather simply redesignated the 

requirement as new paragraph 36(c)(2). 

A consumer advocate commented that, 

in addition to prohibiting pyramiding of 

late fees, the regulation should prohibit 

assessing a late fee for nonpayment of 

any other fee owed. The Bureau 

observes that because the proposal was 

not intended to enact any substantive 

changes to the prohibition on 

pyramiding late fees and the Bureau 

accordingly did not solicit comment on 

how the prohibition might be altered, 

the comment exceeds the scope of the 

rulemaking. Accordingly, the rule is 

finalized as proposed. 

36(c)(3) Payoff Statements 

Dodd-Frank Act section 1464(b) 

established TILA section 129G, which 

requires that a creditor or servicer send 

an accurate payoff balance to the 

consumer within a reasonable time, but 

in no case more than seven business 

days, after the receipt of a written 

request for such balance from or on 

behalf of the consumer. This provision 

generally codified existing 

§ 1026.36(c)(1)(iii) of Regulation Z 

regarding provision of payoff 

statements, but with four substantive 

changes. First, while existing Regulation 

Z only applies the requirement to 

servicers, the statute applies the 

requirement to both servicers and 

creditors. The Bureau proposed 

extending the requirement to assignees 

as well. Second, the statute applies the 

prompt response requirement to ‘‘home 

loans,’’ rather than consumer credit 

transactions secured by the consumer’s 

principal dwelling. The Bureau 

proposed to interpret use of the term 

‘‘home loans’’ to expand the scope of 

the Regulation Z requirement from 

consumer credit transactions secured by 

principal dwellings to consumer credit 

transactions secured by any dwelling.113

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10957 

elsewhere in TILA) to have the same meaning as 

‘‘consumer.’’ 

114See existing Regulation Z § 1026.36 (c)(1). 

115See TILA section 129G. 

Third, the statute and the proposed rule 

limit the reasonable time for responding 

to a request for a payoff balance to not 

more than seven business days; by 

contrast, existing comment 36(c)(1)(iii)– 

1 generally created a five business day 

safe harbor for responding, but noted 

that it might be reasonable to take longer 

to respond in certain circumstances. 

Fourth, consistent with TILA section 

129G, the proposed rule would have 

required a prompt response only to 

written requests for payoff amounts, 

while the existing regulation requires a 

prompt response to all such requests, 

including, for example, oral requests. 

Comments on the proposed rule on 

payoff balances focused on the scope, 

timing and procedures for requesting a 

payoff balance. With respect to the 

scope of the proposed rule, a credit 

union trade association urged that the 

Bureau retain the limitation to loans 

secured by a principal dwelling because 

of the potential impact of the 

application of the rule to home equity 

lines of credit (HELOCs). 

Numerous industry commenters 

indicated that the requirement that a 

payoff balance must be provided no 

more than seven business days after the 

request was problematic because 

additional time may be needed to 

provide payoff statements in a variety of 

situations, such as for reverse 

mortgages; loans in delinquency, 

bankruptcy or foreclosure; loans that 

have shared appreciation features; loans 

with payoff requests from unverified 

third parties; and circumstances in 

which an act of God makes compliance 

within seven business days impossible. 

One credit union commenter stated that 

the seven business day requirement is 

unreasonable in light of the volume of 

mail processed by that institution. 

Further, a trade association requested 

flexibility where the creditor, assignee 

or servicer relies on a payment that was 

later dishonored or that the consumer 

reversed. A number of commenters also 

requested clarification regarding the 

seven business day requirement in light 

of the 2012 HOEPA Proposal for a 

payoff statement to be provided within 

five business days. 

Finally, commenters disagreed 

regarding whether a creditor, assignee or 

servicer should only be required to 

provide a payoff statement in response 

to a written request. Some consumer 

advocate commenters felt that an oral 

request should still be sufficient to 

require a payoff balance; however, an 

industry commenter strongly supported 

limiting the payoff statement 

requirements to written requests. One 

credit union trade association 

commenter requested standardized 

requirements regarding submission of 

payoff balance requests and a housing 

finance agency commenter questioned 

whether the information requests 

provision of the 2012 RESPA Servicing 

Proposal could be used to submit a 

payoff request. Finally, three 

commenters asked the Bureau to 

consider how the payoff statement 

provisions would interact with 

timelines of State and local law. 

The Bureau is adopting the proposed 

rule as the final rule, with modifications 

to the timing requirements. Specifically, 

the Bureau believes it is appropriate in 

certain scenarios to allow creditors, 

assignees or servicers more time than 

seven business days to respond to a 

request for a payoff balance. 

The Bureau believes the requirements 

of the rule regarding the scope and 

procedures for requesting a payoff 

statement are necessary and appropriate 

to implement the statutory provisions. 

With respect to the scope, Congress 

reviewed the prior regulation, which 

defined the scope as ‘‘a consumer credit 

transaction secured by a principal 

dwelling.’’ 114 Congress chose to require 

prompt crediting of payments only ‘‘in 

connection with a consumer credit 

transaction secured by a consumer’s 

principal dwelling’’ but expanded the 

payoff provisions to apply to any ‘‘home 

loan.’’ 115 For these reasons, the Bureau 

believes it is appropriate to interpret 

TILA section 129G to include HELOCs 

and other open-ended lines of credit 

secured by a consumer’s dwelling in the 

payoff statement requirement. 

Similarly, limitations on the 

requirement to provide a payoff 

statement only in response to written 

requests reflects Congress’s clear change 

in the language from the existing 

regulation. Creditors, assignees or 

servicers are permitted, however, to 

continue providing payoff statements in 

response to an oral request, even if such 

requests do not trigger the regulatory 

payoff statement request requirements. 

The Bureau carefully considered the 

comments requesting more time in 

certain scenarios, and recognizes that it 

may not always be feasible to provide a 

payoff statement within seven days. 

Thus, the final rule includes the 

following exemption: When it is not 

feasible to provide a payoff statement 

because a loan is in bankruptcy or 

foreclosure, because the loan is a reverse 

mortgage or shared appreciation 

mortgage, or because of the occurrence 

of natural disasters or other similar 

circumstances, the payoff statement 

must be provided within a reasonable 

time. Regarding third party 

authorization, the Bureau believes that 

the seven day timeline does not begin 

until a request is received from a 

verified party. Thus, if a creditor, 

assignee or servicer must verify 

authorization for a third party, they will 

have seven days from when a verified 

request is received to provide the payoff 

statement, and the need for verification 

should not cause a problem with 

providing the payoff balance within the 

allotted time line. 

Finally, the Bureau acknowledges 

there may be State or local laws 

addressing the timeline for payoff 

statements which allow 3 to 21 days; 

however the Bureau does not believe 

this will cause a direct conflict with the 

timeline of the final rule. The timeline 

for payoff statements states the 

maximum time within which a payoff 

statement must be provided, so 

creditors, assignees or servicers could 

comply with both State law timelines 

and this rule’s timelines by providing 

the payoff statement within the shorter 

of the two timelines. The Bureau 

believes that State laws allowing a 

longer period of time do not prohibit the 

creditor, assignee or servicer from 

providing a payoff statement within 

seven business days. Thus, there is no 

direct conflict with State law on this 

issue, and any inconsistency with State 

or local laws should not present a 

problem. 

The Bureau does not believe further 

regulation on procedures around payoff 

balances is necessary. A payoff balance 

request is any request from a consumer, 

or appropriate party acting on behalf of 

the consumer, which inquires into the 

total amount outstanding on the loan, or 

the amount needed to pay off the loan. 

While such requests are most often 

made when a consumer is refinancing 

their loan, payoff balance requests are 

not limited to this context. If a request 

is sent to the wrong address and not 

received by the creditor, assignee or 

servicer, they would not be required to 

respond. Upon receipt of a payoff 

balance request, the creditor, assignee or 

servicer must provide the amount 

required to pay off the mortgage loan; 

such information must be provided 

within seven business days. The payoff 

statement may be sent electronically or 

by fax in place of physical delivery. 

Finally, an issue was raised about 

whether a payoff statement was accurate 

when a payoff statement relied on a 

payment that was later dishonored. The 

Bureau is not making any changes to the 

requirements of the accuracy of the 

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10958 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

116See Small Business Review Panel Report, at 

27, 32. 117TILA section 128(f)(1). 

statement. The Bureau believes payoff 

statements should be issued according 

to the best information available at the 

time, and if a payment is later 

dishonored, recovery of that amount by 

adding the amount to the payoff balance 

should not be barred by the issuance of 

a payoff statement which assumed that 

the payment would be honored. 

The Bureau received comments on 

interactions between the proposed rule 

on payoff statements and other rules on 

mortgage servicing. First, the Bureau 

considered if requests for payoff 

balances are subject to the oral 

information request obligation 

contained in the 2012 RESPA Servicing 

Proposal. Although a payoff balance 

request is essentially a request for 

information, there are subtle 

distinctions between the two, including 

that consumers may request payoff 

statements through a variety of 

channels, and servicers have been able 

to charge a fee for a payoff statement. 

The Bureau has decided to maintain a 

separate payoff balance request rule, 

and exempt payoff balance requests 

from the information request provision 

of the 2013 RESPA Final Rule. 

Second, the Bureau acknowledges 

that the timeline for payoff balance 

requests required under HOEPA is 

shorter than the timeline for payoff 

requests required under proposed 

§ 1026.36(c)(3). However, the Bureau 

has decided that this difference does not 

warrant reducing the length of the 

timeline required under the final rule. 

Congress made a clear decision to 

require payoff statements under general 

circumstances within seven business 

days, as indicated by their changing the 

timeline from the existing regulation 

text when that text was codified in 

Dodd-Frank Act section 1464. Congress 

likewise made a clear decision that 

payoff statements for loans under 

HOEPA should be provided within five 

business days, as indicated by the 

language in Dodd-Frank Act section 

1433(d). Additionally, the Bureau notes 

these different timelines are not in 

conflict—any creditor, assignee or 

servicer could comply with both by 

providing the payoff balance within five 

business days. Because of the clear 

intent of Congress and the lack of direct 

conflict between the timelines, the 

Bureau has decided to finalize the 

provision as proposed. 

Although the statute requires a 

creditor or servicer to send the payoff 

statement, the final rule uses the term 

‘‘provide’’ in place of ‘‘send.’’ The 

Bureau believes the terms have the same 

meaning in this context, but ‘‘provide’’ 

conforms with existing language in 

Regulation Z. 

The Bureau is finalizing the rule as 

proposed, with the addition of the 

following clause: when a creditor, 

assignee, or servicer, as applicable, is 

not able to provide the statement within 

seven business days of such a request 

because a loan is in bankruptcy or 

foreclosure, because the loan is a reverse 

mortgage or shared appreciation 

mortgage, or because of natural disasters 

or other similar circumstances, the 

payoff statement must be provided 

within a reasonable time. 

Small Servicers 

A number of community banks, credit 

unions, small servicers and their trade 

associations requested an exemption for 

small servicers from all the proposed 

provisions in the 2012 TILA Servicing 

Proposal. The Bureau considered if a 

small servicer exemption would be 

appropriate for the requirement on 

payoff statements. The Bureau noted 

that the final rule is very similar to the 

existing rule, which small servicers are 

already in compliance with, as 

evidenced by Small Entity 

Representative comments in the Small 

Business Review Panel.116 In light of 

this, the Bureau does not believe a small 

servicer exemption to the payoff 

statement provision would be 

appropriate. 

Legal Authority 

The extension of the requirement to 

assignees is authorized, among other 

authorities under TILA section 105(a) 

because, for the reasons discussed 

above, it is necessary and proper to 

effectuate the purposes of TILA, 

including to assure a meaningful 

disclosure of credit terms and protect 

the consumer against unfair credit 

billing practices, and to prevent 

circumvention or evasion of TILA. The 

Bureau also uses its authority under 

Dodd-Frank Act section 1405(b) to 

extend the applicability of the payoff 

statement requirements under TILA 

section 129G to assignees. As discussed 

above, this extension serves the interest 

of consumers and the public interest. 

Subjecting creditors, assignees, and 

servicers to the requirements of 

§ 1026.36(c)(3) also promotes 

consistency with final § 1026.20(c) and 

§ 1026.20(d) (ARMs disclosures), which 

likewise apply to creditors, assignees, 

and servicers. 

The exemption to the payoff 

statement requirement, which allows 

payoff statements to be provided within 

a reasonable time when seven business 

days is not feasible due to certain 

circumstances, is necessary and proper 

under TILA section 105(a) to facilitate 

compliance. For the reasons discussed 

above, under certain circumstances it 

would not be feasible to provide a 

payoff statement within seven business 

days. In addition, the Bureau believes, 

in light of the factors set forth in TILA 

section 105(f), that this exemption will 

have minimal effect on the consumer 

protection benefits of the payoff 

statement provision. Specifically, the 

Bureau considers that the exemption is 

proper irrespective of the amount of the 

loan, the status of the consumer 

(including related financial 

arrangements, financial sophistication, 

and the importance to the consumer of 

the loan), or whether the loan is secured 

by the principal residence of the 

consumer. 

Section 1026.41 Periodic Statements for 

Residential Mortgage Loans 

Section 1420 of the Dodd Frank Act 

established TILA section 128(f) 

requiring periodic statements for 

mortgage loans. The Bureau proposed 

implementing the requirements on 

periodic statements in § 1026.41. The 

statute requires the periodic statement 

to disclose seven items of information 

(the amount of the principal obligation, 

current interest rate and reset date if 

applicable, information on prepayment 

penalties and late fees, contact 

information for the servicer, and 

homeownership counselor information), 

as well as such other information as the 

Bureau may prescribe in regulations.117

In developing the proposed rule, the 

Bureau believed the periodic statement 

would provide the greatest value to 

consumers by also providing 

information regarding upcoming 

payment obligations and the application 

of past payments, a list of recent 

transaction activity, additional account 

information, and delinquency 

information. Thus, the Bureau proposed 

pursuant to TILA section 128(f)(1)(H) 

that each periodic statement also 

include this additional information. 

Additionally, the proposed regulation 

set forth requirements regarding the 

timing and form of the periodic 

statement and established exemptions to 

the requirement to provide a periodic 

statement. 

Under TILA section 128(f)(1), the 

requirement to provide a periodic 

statement applies to creditors, assignees, 

and servicers of residential mortgage 

loans. The Bureau interprets this to 

mean that the consumer must only 

receive one periodic statement each 

billing cycle, but creditors, assignees, 

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and servicers would all be responsible 

for ensuring that the consumer receives 

a periodic statement that meets the 

requirements of § 1026.41. To increase 

readability, proposed § 1026.41 used the 

term ‘‘servicer’’ to describe the entities 

covered by the proposed requirement, 

and defined ‘‘servicer’’ to mean 

creditors, assignees, or servicers for the 

purposes of § 1026.41. This terminology 

was also used in the section-by-section 

analysis of proposed § 1026.41. 

Proposed comment 41(a)–3 clarified that 

only one periodic statement must be 

sent to the consumer each billing cycle, 

while the creditor, assignee and servicer 

are subject to the periodic statement 

requirement, they may decide among 

themselves who will send the statement. 

The Bureau’s interpretation of the 

statute would not apply the ongoing 

periodic statement requirements to an 

entity that originated the loan, but has 

sold both the loan and the servicing 

rights and no longer has any connection 

to the loan. 

The proposed periodic statement 

carefully balanced the need to provide 

consumers with sufficient information 

against the risk of overwhelming 

consumers with too much information. 

The proposed requirements were 

designed to make the statement easy to 

read, whether provided in a paper form 

or electronically. The Bureau believed 

that imposing a requirement that 

information be grouped into defined 

categories would present the 

information in a logical format, while 

allowing servicers flexibility in 

customizing the statement. Thus, the 

proposed regulations discussed below 

required the following groupings of 

information: 

• The Amount Due: The most 

prominent disclosure on the statement 

would be the amount due. The due date 

of the payment and information on the 

late fee were also included in this 

grouping. 

• Explanation of Amount Due: This 

grouping would include a breakdown of 

the amount due, showing allocation to 

principal, interest, and escrow. This 

grouping would also provide the total 

sum of any fees or charges imposed, and 

any amount of past due payment. 

• Past Payment Breakdown: This 

grouping would include a breakdown of 

how previous payments were applied. 

• Transaction Activity: This grouping 

would be a list of any activity that 

credits or debits the outstanding 

account balance, for example, charges 

imposed or payments received. 

The periodic statement would have 

also included the following information: 

• Certain messages as required at 

certain times (for example, information 

on funds held in a suspense or 

unapplied funds account). 

• Contact information for the servicer. 

• Account information as required by 

the statute, including the amount of the 

principal obligation, current interest 

rate, and when it might change (if 

applicable), information on prepayment 

penalties (if applicable) and late fees, 

contact information for the servicer, and 

homeownership counselor information. 

• Finally, additional delinquency 

information would be required when a 

consumer is more than 45 days 

delinquent on his or her loan. Each of 

these disclosures is discussed below. 

41(a) In general 

Proposed § 1026.41(a) stated the 

general requirement that, for a closedend consumer credit transaction secured 

by a dwelling, a creditor, assignee, or 

servicer must transmit to the consumer 

for each billing cycle a periodic 

statement meeting the timing, form, and 

content requirements of § 1026.41, 

unless an exemption applies. 

Periodic Statements Overall 

While many commenters were 

supportive of the periodic statements, 

some commenters had concerns about 

certain requirements, and some 

commenters requested the Bureau not 

require periodic statements at all. Such 

industry commenters felt that some of 

the information was unnecessary, and 

the rest of the information was available 

through other channels, including the 

original loan documents, Web sites with 

information on the loan, existing 

disclosures, formal information request 

procedures, and informal channels. 

These commenters also expressed 

concern that the Bureau was expanding 

the required content of the periodic 

statement beyond that which was 

specifically required in the Dodd-Frank 

Act, and that there was too much 

information on the periodic statement, 

resulting in a disclosure that was too 

busy and confusing to the consumer. 

Commenters sought clarification 

about the periodic statement in the 

context of loans that have been 

accelerated, sent to foreclosure, or that 

are in the bankruptcy process. Several 

commenters contended that statements 

should not be required when loans have 

been accelerated or sent to foreclosure. 

Commenters presented opposing views 

about loans in bankruptcy—some 

consumer advocate commenters felt it 

was essential that statements be 

provided to consumers in bankruptcy to 

ensure they are kept informed on the 

status of their loan and have a record of 

the account, while other industry 

commenters insisted that providing 

statements for loans in bankruptcy 

might cause confusion or violate court 

orders or the Fair Debt Collection 

Practices Act (FDCPA). One commenter 

added that if statements must be 

provided to consumers in bankruptcy, 

the statement should be allowed to 

contain any information disclosures or 

messaging required under bankruptcy 

rules or court orders. Finally, 

commenters suggested other triggers for 

when the periodic statement should not 

be required, including if the consumer 

has vacated the premise, if mail has 

been returned due to a bad address, or 

if the consumer has not sent any 

payments nor responded to the 

servicer’s attempts to contact them in 

six months. 

The Bureau carefully considered the 

concerns expressed about the periodic 

statement overall. Congress clearly 

mandated that consumers receive on a 

periodic basis a statement that 

summarizes certain key loan terms 

(such as the interest rate) and contact 

information both for servicers and 

homeownership counselors and 

counseling organizations. Congress also 

authorized the Bureau to require 

additional information. The Bureau 

continues to believe, for the reasons 

listed in the discussion of the proposed 

rule, as well as for the reasons set forth 

below, that including the information 

required beyond that specifically listed 

in the Dodd-Frank Act will allow the 

periodic statement to serve a variety of 

important purposes, including 

informing consumers of their payment 

obligations, providing information about 

the mortgage loan, creating a record of 

transactions that increase or decrease 

the outstanding balance, providing 

information needed to identify and 

assert errors, and providing information 

when consumers are delinquent. 

Indeed, the Bureau believes that 

consumers likely would be perplexed if 

they were to receive, on a periodic basis, 

statements which contained information 

about their loan terms and outstanding 

balance but did not include any 

information about payments. Each item 

of information required by the periodic 

statement is discussed below in the 

section-by-section analysis of the 

content of the periodic statements. 

The Bureau acknowledges that some 

of the information on the periodic 

statement may be available through 

other channels; however, the Bureau 

notes that Congress clearly determined 

certain information should be required 

to be provided to consumers in a single 

statement on a periodic basis. The 

Bureau appreciates the concern about 

potentially confusing the consumer or 

obscuring important information by 

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10960 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

providing too much on the periodic 

statement. The Bureau believes the 

periodic statement should be a snapshot 

of the present account, and not a recital 

of servicer policies. The Bureau believes 

that requiring certain information to be 

on the front page will ensure important 

information is highlighted. Further, the 

Bureau has mandated the grouping 

requirements discussed in § 1026.41(d) 

below. The Bureau believes the final 

periodic statement balances the need to 

present a significant amount of 

important information and 

documentation on the loan, with the 

need to present information in a format 

the consumer will be able to understand 

and process. 

The Bureau also carefully considered 

the concerns expressed about 

circumstances in which periodic 

statements should not be required. 

While the Bureau acknowledges that 

circumstances such as acceleration 

could make providing a periodic 

statement more complicated, the Bureau 

notes that such circumstances are often 

precisely when a consumer most needs 

the periodic statement. The Bureau 

believes an important role of the 

periodic statement is to document fees 

and charges to the consumer; as long as 

such charges may be assessed, the 

consumer is entitled to receive a 

periodic statement. The Bureau 

understands the concerns about the 

periodic statement being provided when 

a consumer is in bankruptcy, and 

addresses these concerns in the sectionby-section analysis of § 1026.41(d)(2) 

(Explanation of Amount Due) below. 

Scope 

Under TILA section 128(f), the 

periodic statement requirement applies 

to residential mortgage loans. The term 

‘‘residential mortgage loan’’ is defined 

in TILA section 103(cc)(5) to generally 

mean any consumer credit transaction 

that is secured by a mortgage, deed of 

trust, or other equivalent consensual 

security interest on a dwelling or on 

residential real property that includes a 

dwelling, other than a consumer credit 

transaction under an open-end credit 

plan. Consistent with this definition, 

proposed § 1026.41(a) would apply the 

periodic statement requirement to ‘‘any 

closed-end consumer credit transaction 

secured by a dwelling.’’ This language 

implements the substantive scope of the 

statute; no substantive change is 

intended. 

One industry trade association 

commenter suggested periodic 

statements should be limited to first lien 

loans secured by the consumer’s 

principal dwelling, because consumers 

obtaining subordinate lien loans and 

loans secured by non-principal 

residences (such as vacation homes) are 

typically experienced successful 

homeowners, as evidenced by the fact 

that such consumers qualified for these 

loans. One commenter asked for 

clarification as to whether HELOCs 

should receive periodic statements, and 

one commenter sought clarity on simple 

interest closed-end home equity loans. 

The Bureau believes that Congress 

clearly specified the scope of the 

periodic statement requirement by using 

the defined term ‘‘residential mortgage 

loans.’’ This scope is not limited to first 

lien loans secured by the consumer’s 

principal dwelling, but covers all 

closed-end consumer transactions 

secured by a dwelling. However, openend transactions are not included in the 

scope of this rule. The scope of the rule 

is finalized as proposed. 

Transmit to the Consumer 

Proposed § 1026.41(a) would have 

required the servicer to transmit the 

periodic statement to the consumer. The 

term ‘‘transmit’’ is used in the statute. 

Use of this term would indicate that the 

servicer must do more than simply 

make the statement available; the 

statement must be sent to the consumer. 

Paper statements mailed to the 

consumer would meet this requirement. 

As discussed below with respect to 

proposed § 1026.41(c), if the servicer is 

using an electronic method of 

distribution, a servicer may send the 

consumer an email indicating that the 

statement is available, rather than 

attaching the statement itself, to account 

for information security concerns. 

Proposed comment 41(a)–1 clarified that 

joint obligors need not receive separate 

statements; a single statement addressed 

to both of them would satisfy the 

periodic statement requirement. 

All comments on this topic were in 

relation to electronic statements, which 

are discussed in § 1026.41(c) below. The 

final rule uses the term ‘‘provide’’ in 

place of ‘‘transmit.’’ The Bureau 

believes the terms have the same 

meaning in this context, but ‘‘provide’’ 

conforms with existing language in 

Regulation Z. This provision is 

otherwise adopted as proposed. 

Billing Cycles 

Proposed § 1026.41(a) would have 

required a periodic statement to be sent 

each ‘‘billing cycle.’’ The billing cycle 

corresponds to the frequency of 

payments, as established by the legal 

obligation of the consumer under the 

mortgage note and any subsequent 

modifications. Thus, if a loan requires 

the consumer to make monthly 

payments, that consumer will have a 

monthly billing cycle. Likewise, if a 

consumer makes quarterly payments, 

that consumer will have a quarterly 

billing cycle. 

Based on industry outreach, the 

Bureau has learned of other alternatives 

to monthly billing cycles. Some loans 

may be timed to accommodate 

consumers employed in seasonal 

industries (for example, a loan may have 

10 payments over the course of a year). 

For such loans the billing cycle may not 

align with the calendar months. Another 

non-monthly payment arrangement may 

occur when payments are made every 

other week, or other similar less-thanmonthly periods. For example, servicers 

and consumers may arrange a bi-weekly 

payment program to align mortgage 

payments with the consumer’s 

paychecks. Such billing cycles may be 

arrangements with the servicer that do 

not modify the legal obligation of the 

consumer. In such cases, a periodic 

statement may, but is not required to, 

reflect this modified payment cycle. 

The Bureau realized that a 

requirement to provide statements every 

other week may be costly for servicers 

and unhelpful to consumers. In 

addition, such a short cycle may cause 

problems with information on the 

statement being outdated. Thus, 

proposed § 1026.41(a) provided that, if a 

loan has a billing cycle shorter than a 

period of 31 days (for example, a biweekly billing cycle), a single periodic 

statement may be used to cover the 

entire month. Proposed comment 41(a)– 

2 clarified how such a single statement 

would aggregate information from 

multiple billing cycles. All comments 

on this topic were in relation to timing 

of the periodic statement, discussed in 

the section-by-section analysis of 

§ 1026.41(b) below. The rule is 

otherwise adopted as proposed. 

Legal Authority 

Section 1026.41(a) implements TILA 

section 128(f)(1) requiring that a 

creditor, assignee, or servicer, with 

respect to any closed-end consumer 

credit transaction secured by a dwelling, 

must transmit a periodic statement to 

the consumer. In addition, the Bureau is 

using its authority under TILA section 

105(a) and (f) and Dodd-Frank Act 

section 1405(b) to exempt creditors, 

assignees, and servicers of residential 

mortgage loans from the requirement in 

TILA section 128(f)(1)(G) to transmit a 

periodic statement each billing cycle 

when the billing cycle is less than a 

month, and to instead permit servicers 

to provide an aggregated periodic 

statement covering an entire month. For 

the reasons discussed above, the Bureau 

believes that the exception is necessary 

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and proper under TILA section 105(a) 

both to effectuate the purposes of 

TILA—to promote the informed use of 

credit and protect consumers against 

inaccurate and unfair credit billing 

practices—and to facilitate compliance. 

Moreover, the Bureau believes, in light 

of the factors in TILA section 105(f), that 

sending periodic statements more than 

once a month would not provide a 

meaningful benefit to consumers. 

Specifically, the Bureau considers that 

the exemption is proper irrespective of 

the amount of the loan, the status of the 

consumer (including related financial 

arrangements, financial sophistication, 

and the importance to the consumer of 

the loan), or whether the loan is secured 

by the principal residence of the 

consumer. Further, in the estimation of 

the Bureau, consistent with Dodd-Frank 

Act section 1405(b), the exemption will 

prevent consumer confusion that might 

result from receiving multiple periodic 

statements in close sequence, thus 

furthering the consumer protection 

purposes of the statute. 

41(b) Timing of the Periodic Statement 

Proposed § 1026.41(b) provided that 

the periodic statement must be sent 

within a reasonably prompt time after 

the close of the grace period of the 

previous billing cycle. Proposed 

comment 41(b)–1 provided that four 

days after the close of any grace period 

would be considered reasonably 

prompt. 

Initial Statement 

The proposal would have required 

that the initial periodic statement be 

sent no later than 10 days before this 

first payment is due. This adjustment 

was proposed because there is no 

previous billing cycle from which to 

time the sending of the first statement. 

Commenters expressed concern both 

about the usefulness and the feasibility 

of the provision, highlighting that 

information on the first payment is often 

included in the closing documents, and 

that it may not be possible to obtain the 

documents and transmit the information 

into the servicer’s system in the 

proposed timeline. 

The Bureau determined that the 

initial periodic statement would provide 

minimal benefit to consumers, as the 

initial payment information is provided 

at closing, and information on the 

application of that payment, as well as 

any transaction activity, would be 

included in the next periodic statement. 

Additionally, the Bureau acknowledged 

the extra costs of implementation and 

the difficulties of providing an initial 

statement on the proposed timeline. Due 

to these factors, the Bureau has decided 

not to finalize the proposed requirement 

that an initial periodic statement be 

provided 10 days before the first 

payment is due. 

Ongoing Statements 

The periodic statement serves the 

dual purposes of giving an accounting of 

payments received since the previous 

periodic statement, and reminding the 

consumer about the upcoming payment. 

To achieve these dual purposes, the 

periodic statement must arrive after the 

last payment was received and before 

the next payment is due, which can be 

a relatively narrow window. 

Commenters emphasized that because 

of the tight timeframe between the close 

of the grace period and the due date of 

the next payment, sending the 

statements within four days was not 

consistent with current practices and 

may not be operationally feasible. 

Commenters suggested seven or ten 

days may be a more reasonable 

timeframe, or that statements should be 

allowed to be sent earlier in the month. 

Multiple industry commenters also 

cited their current practice of 

‘‘staggering’’ statements throughout the 

month–although their loans have a due 

date of the first of the month, batches of 

statements are sent out at various times 

during the month. Some servicers 

explained that it is helpful for a servicer 

to spread the related workload across 

the month, while others explained that 

staggered statements allowed consumers 

the convenience and flexibility of 

choosing which day of the month their 

payments will be due. 

Many credit union commenters noted 

that the timing requirements would 

prevent servicers from providing 

combined statements–a common 

practice among credit unions of 

combining mortgage statements with 

other account statements. These 

commenters requested that the proposed 

rule be modified to allow combined 

statements. In contrast, a consumer 

advocate commenter expressly 

requested the Bureau prohibit the 

practice of combining statements on the 

ground that this creates confusion for 

consumers. 

Regarding situations in which a 

consumer makes more than one 

payment during the month, commenters 

asked if they would be allowed to send 

more than one statement per month 

(following the ‘‘Bill and Receipt’’ 

system). Commenters also asked for 

clarification on billing cycles of less 

than one month and sought clarification 

about the four day period after the close 

of the grace period. 

The Bureau acknowledges that use of 

the term ‘‘grace period’’ in the proposal 

may have caused unnecessary 

confusion. The term ‘‘grace period’’ is 

defined in relation to open-ended credit, 

in § 1026.5(b)(2)(ii)(B)(3), as a period 

within which any credit extended may 

be repaid without incurring a finance 

charge due to a periodic interest rate. 

The Bureau believes a periodic 

statement should be sent no later than 

four days after the close of the period of 

time when no late fee is imposed, a time 

more appropriately described as a 

‘‘courtesy period’’ in comment 

7(b)(11)–1. In light of this, the final rule 

replaces the term ‘‘grace period’’ with 

‘‘courtesy period’’, and adds comment 

41(b)–2 to provide further guidance in 

this regard. Further, if a mortgage loan 

has no courtesy period, the periodic 

statement must be sent no later than 

four days after the payment is due. 

The Bureau acknowledges it may be 

difficult to process a large number of 

statements in the short period of time 

between the close of the courtesy period 

and four days later, and understands the 

difficult balance between providing 

accurate and up-to-date information 

(which may require not sending a 

periodic statement until after the 15th of 

a month), and the importance of 

notifying the consumer in a timely 

manner of the amount of their upcoming 

payment. The Bureau notes that while 

the rule requires a periodic statement to 

be sent no later than four days after the 

close of any courtesy period, there is no 

restriction on sending the periodic 

statement earlier in the month. That is, 

there is no requirement in the rule that 

the servicer must wait until the close of 

the courtesy period to send the periodic 

statement. This gives servicers the 

flexibility to send statements earlier in 

the month. The Bureau notes this would 

be particularly appropriate in certain 

scenarios–for example, if a consumer 

makes a payment on the first of the 

month (rather than waiting until the end 

of the courtesy period), or a consumer 

has an ‘‘auto-debit’’ arrangement to 

make payments earlier in the month. 

The Bureau believes this flexibility will 

address concerns about timing 

difficulties for combined statements. 

Other concerns about combining 

statements are discussed below in the 

section-by-section analysis of paragraph 

41(d) concerning layout. 

To clarify the rule on timing, the 

Bureau notes that, if a consumer makes 

more than one payment during the 

month, servicers who have not yet sent 

the periodic statement for that time 

period may include all payments as 

separate transaction items in the 

transaction activity section. 

Alternatively, if a servicer has already 

sent the periodic statement, the 

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subsequent payments could be reflected 

in the next periodic statement. Finally, 

if a servicer wishes to send an extra 

periodic statement reflecting additional 

payments, nothing in the regulation 

would prevent this practice. 

If a servicer and a consumer have 

agreed to an alternative billing cycle 

from that reflected in the underlying 

security (for example, if a servicer 

arranges a bi-weekly payment plan to 

correspond to a consumer’s paychecks), 

the servicer has the option of sending 

either periodic statements that reflect 

the underlying obligation (the payment 

plan in the original note), or periodic 

statements that reflect the modified 

payment arrangement (the agreed-on 

payment plan). If this, or any payment 

plan, requires payments that are more 

frequent than on a monthly basis, the 

servicer has the option of combining 

statements and sending one aggregated 

statement that covers the entire month 

in place of multiple statements during 

that month. The periodic statement 

must be delivered or placed in the mail 

no later than a reasonably prompt time 

after the payment due date or the end 

of any courtesy period provided for the 

previous billing cycle. 

Legal Authority 

The Bureau interprets the requirement 

in TILA section 128(f) that a periodic 

statement be transmitted for ‘‘each 

billing cycle’’ to authorize the timing 

requirements in § 1026.41(b). In 

addition, the timing requirements are 

authorized under TILA section 105(a) 

and Dodd-Frank Act sections 1032(a) 

and 1405(b). For the reasons noted 

above, the Bureau concludes, pursuant 

to TILA section 105(a), that the 

requirements are necessary and proper 

to effectuate the purposes of TILA. 

Specifically, § 1026.41(b) promotes the 

meaningful disclosure of credit terms 

and protects consumers against 

inaccurate and unfair credit billing 

practices by ensuring that consumers 

receive the periodic statement at a time 

that is useful to them. In addition, 

consistent with Dodd-Frank Act section 

1032(a), the Bureau believes that the 

timing requirements help ensure that 

the features of consumers’ residential 

mortgage loans, both initially and over 

the term of the loan, are effectively 

disclosed to consumers in a manner that 

permits them to understand the costs, 

benefits, and risks associated with the 

loan. Moreover, consistent with DoddFrank Act section 1405(b), the Bureau 

believes that the timing requirements 

improve consumer awareness and 

understanding of their residential 

mortgage loans by ensuring that 

consumers receive the periodic 

statements at a meaningful time, before 

their next payment is due, and that the 

timing requirements are thus in the 

interest of consumers. 

41(c) Form of the Periodic Statement 

Proposed § 1026.41(c) provided that 

the periodic statement disclosures 

required by § 1026.41 must be made 

clearly and conspicuously in writing, or 

electronically, if the consumer agrees, 

and in a form the consumer may keep. 

Paper statements sent by mail or 

provided in person would satisfy this 

requirement. If electronic statements are 

used, they must be in a form which the 

consumer can print or download. 

Additional Information Allowed 

Proposed comment 41(c)–1 clarified 

the clear and conspicuous standard, 

stating that it generally requires that 

disclosures be in a reasonably 

understandable form, and explained 

that other information may be included 

on the statement, so long as that other 

information does not overwhelm or 

obscure the required disclosures. Thus, 

information that servicers customarily 

provide in their periodic statements, but 

is not required by the regulation, such 

as the servicer’s logo, information on 

payment methods, or additional 

information on escrow accounts, may 

continue to be included on periodic 

statements. Proposed comment 41(c)–2 

stated that nothing in subpart C 

prohibits a servicer from including 

additional information or combining 

disclosures required by other laws with 

the disclosures required by § 1026.41, 

unless such prohibition is expressly set 

forth in § 1026.41 or other applicable 

law. 

One commenter requested further 

clarification on the comment that 

additional information may be included 

so long as it does not overwhelm or 

obscure the required disclosures. This 

commenter cited concerns that this 

clarification would be used by 

consumer lawyers in frivolous litigation, 

and urged that the commentary include 

several examples. Another commenter 

noted that allowing other information 

without requiring prescriptive content 

minimizes unnecessary regulatory 

burdens and accommodates different 

systems that servicers use. The Bureau 

believes the guidance given in the 

proposed commentary is sufficient, and 

that the clear and conspicuous standard 

allows an appropriate amount of 

flexibility. Thus, comments 41(c)–1 and 

41(c)–2 are adopted as proposed. 

Electronic Distribution: E-Statements, 

Notifications and Opt-Outs 

TILA section 128(f)(2) provides that 

periodic statements ‘‘may be transmitted 

in writing or electronically.’’ Consistent 

with this provision, proposed 

§ 1026.41(c), as clarified by proposed 

comment 41(c)–3, would have allowed 

statements to be provided electronically, 

if the consumer agrees. Commenters 

were generally in favor of allowing 

electronic statements (e-statements) in 

place of paper statements, but expressed 

a few concerns about consent of the 

consumer and the notification process. 

E-statements. Comments were 

generally in favor of allowing estatements in place of paper statements, 

but only if the consumer has given 

consent. The final rule requires 

servicers to send a periodic statement 

each month to consumers. Under certain 

circumstances, a servicer may send estatements in place of paper statements. 

No servicer is required to send estatements. If a servicer prefers to send 

e-statements (rather than paper 

statements), they may do so, provided 

that the consumer consents. The issue of 

consent is discussed below. Once a 

consumer consents to receiving estatements, the servicer may send 

statements electronically in place of 

paper statements. A servicer must 

continue to send paper statements to a 

consumer unless the consumer has 

consented to receiving e-statements. 

E-Sign Act. The proposed rule would 

have provided that if a servicer prefers 

to provide statements electronically, 

they may do so if the consumer 

consents. The proposal would have 

required only affirmative consent by the 

consumer to receive statements 

electronically, not full compliance with 

E-Sign Act verification procedures. 

Comments indicated some confusion 

about this provision. Some commenters 

argued that meeting the E-Sign Act 

requirements should be considered 

consent, and some commenters stated 

that the proposal’s provision not 

requiring E-Sign verification procedures 

appeared to be in conflict with E-Sign 

Act requirements. Other commenters 

praised this aspect of the proposal, 

stating that the E-Sign verification 

procedures are too cumbersome and a 

lesser standard would be more 

appropriate. One commenter suggested 

this should be addressed by amending 

the E-Sign Act. 

As the proposal explained, the Bureau 

believes the E-Sign Act’s higher level of 

confirming consent is not mandated by 

the statute nor required in this situation. 

The E-sign Act generally provides that 

if information must be provided or 

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118Additionally, the Bureau notes that TILA 

section 128(f)(2) requires the Bureau to take into 

account that statements may be transmitted 

electronically. This further suggests the periodic 

statement disclosure is not a ‘‘writing’’ which 

would trigger the E-Sign Act requirements. 119The final forms are in appendix H–30. 

made available in writing, such info 

must be provided electronically if 

certain verification procedures are met. 

The Bureau notes that TILA section 

128(f) does not require a ‘‘writing’’; 

thus, the Bureau does not believe this 

provision triggers the E-Sign Act.118 The 

Bureau believes that only consumer 

consent, not the full E-Sign verification 

procedures are required before a 

servicer may provide a statement 

electronically in place of paper. If a 

servicer would like to follow the E-Sign 

Act procedures to obtain consumer 

consent, that would be allowed, but 

servicers may also obtain consent 

through a simpler process. The Bureau 

is adopting the comment as proposed. 

Consent. Commenters also discussed 

what should be presumed to be 

‘‘consent.’’ Some industry commenters 

suggested that if a consumer has autodebit set up to pay their mortgage 

automatically, they should be presumed 

to have consented to e-statements. 

Others suggested that consumers who 

are currently receiving e-statements, or 

who have consented to electronic 

disclosures in the past should be 

deemed as having consented to 

receiving e-statements. 

The Bureau suggested, and 

commenters agreed, that anyone who is 

currently receiving certain information 

electronically from their servicer shall 

be deemed to have consented to 

receiving e-statements in place of paper 

statements. Such consumers have 

demonstrated their ability and 

willingness to receive information 

electronically. This is clarified in 

comment 41(c)–4. The Bureau does not 

believe that consumers who pay their 

mortgage through auto-debit, but who 

have not consented and are not 

currently receiving information 

electronically, shall be deemed to have 

consented to e-statements. Such 

consumers must receive paper 

statements until the servicer obtains 

some form of consent from the 

consumer that they are willing to 

receive information electronically. The 

Bureau is adopting the rule as proposed, 

with the addition of comment 41(c)–4 

clarifying presumed consent. 

Notification. In light of information 

security concerns, the proposal stated 

the requirement to transmit a periodic 

statement to the consumer may be met 

by sending the consumer an email 

notification that the statement is 

available electronically, rather than 

emailing the statement itself. Two 

commenters expressed concern about 

information security. 

The Bureau recognizes that, due to 

concerns about information security, 

servicers may not want to send periodic 

statements electronically. Thus, instead 

of emailing a statement, servicers may 

make the statement available on a Web 

site and send an email notifying the 

consumer that the statement is 

available. The Bureau notes that it is a 

common practice for a financial 

institution to contact a customer to let 

them know a message is available on a 

secure Web site. The Bureau also notes 

that notifying a consumer of a message 

on a secure Web site presents less of a 

risk than emailing the message, with 

potentially sensitive personal 

information, directly to the consumer. 

Finally, the Bureau notes that if a 

servicer does not have the system to 

securely notify their consumers of the 

availability of a periodic statement on a 

secure Web site, such institution may 

continue to provide paper statements. 

Opting-out. Commenters expressed 

concerns about the notification 

requirement. Specifically two 

commenters suggested the Bureau allow 

alternative forms of notification, such as 

quarterly statements or text messages. 

Additionally, a number of commenters 

suggested that consumers be allowed to 

opt-out of receiving these notifications, 

or be allowed to opt-out of periodic 

statements altogether. Finally, a few 

commenters further suggested that 

consumers should be required to opt-in 

to receiving periodic statements. 

The Bureau carefully considered the 

comments suggesting a consumer either 

be able to opt-out of the periodic 

statement, or be required to opt-in to 

receiving a periodic statement. The 

Bureau has concerns that consumers 

may not be fully informed about their 

rights to periodic statements if they are 

either required to opt-in, or allowed to 

opt-out of statements altogether. 

However, the Bureau also understands 

that many consumers conduct their 

finances online and may prefer not to 

receive monthly reminders about their 

payments (either in paper or 

electronically). These consumers may 

become accustomed to disregarding 

information from their servicer, thus 

both decreasing the value of the 

periodic statement, and presenting the 

risk that these consumers may 

accidentally ignore other important 

information. The Bureau is striking a 

balance in the final rule, as clarified by 

comment 41(a)-4. A consumer may not 

opt-out of receiving periodic statements 

altogether. However, a consumer who 

has demonstrated the ability to access 

statements online may opt out of 

receiving notification that their 

statement is available. If a consumer 

accidentally or inadvertently opts-out of 

receiving such notifications, they would 

still be able to access their periodic 

statements online. These consumers 

would be able to review past periodic 

statements to check for errors or proper 

payment application. However, this 

would allow consumers who do not feel 

they need a monthly reminder—for 

example, consumers enrolled in an 

auto-debit arrangement—to avoid 

receiving unwanted emails each month. 

Sample Forms 

Proposed § 1026.41(c) also stated that 

sample forms are provided in appendix 

H–28,119 and that appropriate use of 

these forms will be deemed to comply 

with the section. The sample forms are 

intended to give guidance regarding 

compliance with proposed § 1026.41; 

however, they are not required forms, 

and any arrangements of the 

information that meet the requirements 

of proposed § 1026.41 would be 

considered in compliance with the 

section. 

While commenters were generally in 

favor of the sample forms, one industry 

commenter expressed concerns about 

the sample forms—mainly that certain 

elements such as printing on the back, 

legal-sized paper, or tear-off coupons on 

the bottom may be difficult for servicers 

to replicate. Additionally, the Bureau 

received stylistic comments on the 

sample forms, suggesting the payment 

due date and fee information should be 

more prominent. Some commenters 

requested greater flexibility in the 

forms, suggesting that not all the 

information would fit on the front page, 

and that the tabular format requirements 

should be eliminated. Other 

commenters addressed the importance 

of a standardized form: one consumer 

commenter noted that his current lender 

provides a statement, but because it is 

so disorganized they are unable to 

understand the statement. 

The Bureau considered the concerns 

about the sample forms, but notes that 

none of the details objected to are 

required by the regulation. For example, 

elements of the sample forms not 

specified in the regulation, such as the 

tear-off coupon and legal sized paper, 

are not required elements of the 

periodic statement. These elements are 

included in the sample forms to provide 

context, and while they show one way 

of demonstrating compliance, they are 

not required. These regulations were 

crafted to give servicers flexibility in 

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10964 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

120See comments 24(b)–2 and 48–3, respectively. 

121Macro Report, at 12. 

designing their periodic statements. 

Thus the Bureau is adopting the rule as 

proposed. 

Legal Authority 

The Bureau is implementing 

§ 1026.41(a) and the related comments, 

in part through the form requirements 

set forth in § 1026.41(c) and the related 

sample forms provided in appendix H– 

30. The form requirements are 

authorized under TILA section 122, 

which requires the disclosures under 

TILA be clear and conspicuous, TILA 

section 105(a) and Dodd-Frank Act 

sections 1032(a) and 1405(b). As 

discussed below, the Bureau concludes, 

pursuant to TILA section 105(a), that the 

form requirements are necessary and 

proper to effectuate the purposes of 

TILA. Specifically, § 1026.41(c) 

promotes the meaningful disclosure of 

credit terms and protects the consumer 

against inaccurate and unfair credit 

billing practices by ensuring that the 

periodic statement sent to consumers is 

in a form that they can understand. In 

addition, consistent with Dodd-Frank 

Act section 1032(a), the Bureau believes 

that the form requirements help ensure 

that the features of consumers’ 

residential mortgage loans, both initially 

and over the term of the loan, are 

effectively disclosed to consumers in a 

manner that permits them to understand 

the costs, benefits, and risks associated 

with the loan. Moreover, consistent with 

Dodd-Frank Act section 1405(b), the 

Bureau believes that the form 

requirements will improve consumer 

awareness and understanding of their 

residential mortgage loans by ensuring 

that the periodic statements sent to 

consumers are in a useable form that is 

easy to understand and that the form 

requirements are thus in the interest of 

consumers and the public interest. 

41(d) Content and Layout of the 

Periodic Statement 

The proposed rule required certain 

items to be grouped together. The 

specific items of content are discussed 

below. The goal of the grouping and 

form requirements is to highlight key 

information such as the amount due, to 

organize information so the statement 

will not be overwhelming to the 

consumer, and to ensure the consumer 

will be presented with information in an 

easy to read format. The commentary to 

§ 1026.41(d), discussed below, reflects 

these goals. 

Proposed § 1026.41(d) required 

specific disclosures be grouped together 

and presented in close proximity. 

Information is grouped together to aid 

the consumer in understanding 

relatively complex information about 

their mortgage. Proposed comment 

41(d)–1 clarified that close proximity 

requires items to be grouped together 

and set off from the other groupings of 

items. This can be accomplished, for 

example, by including lines or boxes on 

the statement, or by including white 

space between the groupings. Items 

required to be in close proximity should 

not have any intervening text between 

them. The close proximity standard is 

found in other parts of Regulation Z, 

including §§ 1026.24(b) and 1026.48. In 

both provisions, the commentary 

interprets close proximity to require 

certain information to be located 

immediately next to or directly above or 

below certain other information, 

without any intervening text or 

graphical displays.120

Proposed comment 41(d)–2 provided 

that information that is not applicable to 

the loan may be omitted from the 

periodic statement. For example, if a 

loan does not have a prepayment 

penalty, the periodic statement may 

omit the prepayment penalty disclosure. 

Proposed comment 41(d)–3 provided 

that the periodic statement may use 

terminology other than that found on 

the sample forms so long as the new 

terminology is commonly understood. 

This gives servicers the flexibility to use 

regional terminology or commonly used 

terms with which consumers are 

familiar. For example, during consumer 

testing in California, participants were 

confused by the use of the term 

‘‘escrow.’’ One participant explained 

that in California, the term ‘‘escrow’’ 

refers to an account set up to hold funds 

until a homebuyer closes on the house. 

This participant said he was more 

familiar with the term ‘‘impound 

account’’ to refer to the account holding 

funds for taxes and insurance.121 In this 

example, use of the term ‘‘impound 

account’’ to refer to the escrow account 

for taxes and insurance would be 

permitted for periodic statements 

provided to consumers in California. 

In addition to addressing the specific 

items of information required by the 

periodic statement (discussed below), 

commenters discussed the overall 

layout of the periodic statement. Some 

industry commenters expressed concern 

that there was not sufficient flexibility 

in the requirements on the periodic 

statement, and that servicers should be 

allowed to continue using their existing 

statements. In contrast, some 

commenters praised the organization of 

the periodic statement. Finally, some 

industry commenters expressed concern 

that requiring all the information to be 

on the front page of the periodic 

statement would prevent combined 

statements. 

In response to the concern about 

requiring too much information on the 

front page, the Bureau notes that not all 

the required content must be on the 

front page of the periodic statement. The 

amount due, explanation of amount 

due, past payment breakdown, and 

contact information must be on the front 

of the periodic statement. The messages 

and delinquency information will only 

be required at certain times, and may be 

provided as a separate disclosure at the 

servicer’s option. An example of how all 

this information could fit on the front of 

the page is provided in the sample 

forms. As discussed above, the Bureau 

believes the periodic statement balances 

the need for information to be presented 

in a structured format against the 

flexibility required for servicers to 

continue the practices that suit their 

needs. For these reasons, the Bureau is 

adopting the proposed rule. 

Legal Authority 

Section 1026.41(d) contains content 

and layout requirements that 

implement, in part, TILA section 128(f), 

and is additionally authorized under 

TILA section 105(a) and Dodd-Frank 

Act sections 1032(a) and 1405(b). 

More specifically, the content 

required by § 1026.41(d) is authorized as 

follows: 

• Statutorily-required content: TILA 

section 128(f)(1)(a) through (g) requires 

the inclusion of certain items of 

information in the periodic statement. 

The final regulation generally 

implements these provisions by 

requiring the content set forth in 

§ 1026.41(d)(1)(ii), (6) and (7), and the 

description of late fees in 

§ 1026.41(d)(4). 

• Additional content: TILA section 

128(f)(1)(H) requires inclusion in 

periodic statements of such other 

information as the Bureau may prescribe 

by regulation. The remainder of the 

content of the periodic statement is 

promulgated under this authority. 

The grouping and other form 

requirements of the layout in 

§ 1026.41(d) implement, in part, the 

requirement under TILA section 

128(f)(1) that the content of the periodic 

statement be presented in a conspicuous 

and prominent manner, and the 

requirement under TILA section 

128(f)(2) for the Bureau to develop and 

prescribe a standard form for the 

periodic statement disclosure. The 

Bureau interprets the term ‘‘standard 

form’’ (a term not used elsewhere in 

TILA, nor in Regulation Z) to include 

sample forms, which are commonly 

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122See Macro Report, at 6. 

123Macro Report, at 15. 

124The final forms are in appendix H–30(C). 

used in Regulation Z. In addition, as 

discussed above with respect to the 

form requirements under § 1026.41(c) 

and for the reasons explained below, the 

grouping and form requirements under 

§ 1026.41(d) are authorized under TILA 

section 105(a) and Dodd-Frank Act 

sections 1032(a) and 1405(b). 

41(d)(1) Amount Due 

Proposed § 1026.41(d)(1) would have 

required the periodic statement to 

provide information on the amount due, 

the payment due date, and the amount 

of any fee that would be assessed for a 

late payment, as well as the date on 

which that fee would be imposed if 

payment is not received. This 

information would have had to be 

grouped together and located at the top 

of the first page of the statement. The 

amount due would have had to be more 

prominent than any information on the 

page. 

A primary purpose of the periodic 

statement is to alert the consumer to 

upcoming payment obligations. The 

Bureau interprets TILA section 

129(f)(1)(E), which requires the periodic 

statement to include a description of 

any late payment fees, to require 

disclosure of the amount of any fees that 

would be assessed for late payments, the 

date the fees would be imposed if the 

payment has not been received, and 

other information regarding late fees 

discussed below. Although information 

concerning the amount due and the 

payment due date is not enumerated in 

the statute, the Bureau believes that this 

is the information the consumer is most 

likely to need and expect. Because of 

the importance of this information, the 

proposed ruled would have required it 

to be placed in the prominent position 

at the top of the first page, with the total 

amount as the most prominent item on 

the page. In consumer testing, all 

participants were able to identify the 

amount due on the sample periodic 

statement presented to them.122 If the 

consumer has a payment-option loan, 

the proposal would have required that 

each of the payment options must be 

displayed with the amount due 

information. An example of such a 

statement is included in appendix 

H–30(C). 

Commenters were supportive of 

including the amount due information 

(amount due, due date, and late fee 

information) on the periodic statement, 

even though this amount was not 

specifically required by the Dodd-Frank 

Act. Thus, the Bureau is adopting the 

proposed provisions on amount due. 

41(d)(2) Explanation of Amount Due 

Proposed § 1026.41(d)(2) would have 

required periodic statements to include 

an explanation of the amount due, 

which would disclose the monthly 

payment amount, including the 

allocation of that payment to principal, 

interest and escrow (if applicable). 

Additionally, the statement would have 

had to provide the total fees or charges 

incurred since the last statement, and 

any amount past-due (which would 

include both overdue payments and 

overdue fees). This information would 

have had to be grouped together in close 

proximity and located on the first page 

of the statement. 

The explanation of amount due is 

intended to give consumers a snapshot 

of why they are being asked to pay the 

amount due. At a glance, consumers 

would be able to see their payment 

amount; how much is allocated to 

principal, interest and escrow (if 

applicable); the total fees or other 

charges incurred since the last 

statement; and any post-due amounts. In 

this section, the fees incurred since the 

last statement would be shown in 

aggregate. A breakdown of the 

individual fees would be provided in 

the transaction activity section required 

by § 1026.41(d)(4), discussed below. 

If the consumer has a payment-option 

loan, a breakdown of each of the 

payment options would have been 

required in the explanation of amount 

due. Additionally, the explanation of 

amount due would have required 

inclusion of information about how 

each of the payment options will affect 

the outstanding loan balance. A form 

with such a box was used during 

consumer testing. All but one of the 

participants were able to understand the 

effects the different payment options 

would have on their loan balance–that 

the loan balance would decrease, stay 

the same (for interest-only payments), or 

increase.123 A sample form was 

provided in proposed appendix H– 

28(C).124

One credit union commenter stated 

that the breakdown of amount due is not 

necessary because consumers are only 

interested in knowing the full amount 

due, not the details. Some commenters 

expressed concern about difficulties in 

providing this payment breakdown, 

specifically in the context of daily 

simple interest loans, precomputed 

loans, and loans when the consumer is 

in bankruptcy. The Bureau also received 

comments asking that periodic 

statements continue to be sent during 

bankruptcy due to the importance of 

providing information to consumers in 

bankruptcy and creating a record of 

payment and applications. Finally, 

while commenters were generally 

supportive of the breakdown for 

payment option loans, two commenters 

suggested more information should be 

required. 

The Bureau believes information 

regarding the components of the amount 

due is important. Including a 

breakdown of the amount due allows a 

consumer to question an improper 

charge before making a payment. 

Additionally, a consumer can compare 

this amount to the past payment 

breakdown on the next statement to 

ensure the payment was properly 

applied. 

The Bureau understands the concerns 

about determining the breakdown for 

daily simple interest loans, as the 

breakdown would change depending on 

which day the consumer makes the 

payment. In determining the breakdown 

of amount due, the servicer may assume 

the consumer will make the payment on 

the due date. Servicers may include a 

note explaining this if they believe it is 

necessary. The Bureau considered the 

risk that this may cause confusion for 

consumers, but believes the consumer 

protection benefits of enabling the 

consumer to understand what they are 

being billed for, and thus to question 

improper charges, outweighs the risk of 

possible confusion. Further, the Bureau 

believes that if a consumer with a daily 

simple interest loan pays his or her loan 

late, the difference in the amount of the 

payment that goes to the principal 

under the amount due (shown on the 

earlier statement), and the amount of 

payment that goes to the principal 

under the application of payment 

(shown on the next statement) may 

highlight the additional cost of paying 

such loans late. 

Additionally, the Bureau considered 

the concerns regarding the breakdown 

of precomputed loans. The Bureau 

understands that precomputed loans do 

not apply payments to principal or 

interest, but rather to the entire amount 

due, which consists of both principal 

and interest for the length of the loan. 

The Bureau notes there are multiple 

accounting systems used to determine 

the outstanding amount when a 

precomputed loan is prepaid. The 

Bureau is not requiring a specific system 

for determining the allocation to 

principal and interest, but rather notes 

that any reasonable system for 

determining the breakdown of principal 

and interest from the total amount due 

would be acceptable for the breakdown 

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10966 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

125For example, servicers may include a 

statement such as: ‘‘To the extent your original 

obligation was discharged, or is subject to an 

automatic stay of bankruptcy under Title 11 of the 

United States Code, this statement is for compliance 

and/or informational purposes only and does not 

constitute an attempt to collect a debt or to impose 

personal liability for such obligation. However, 

Creditor retains rights under its security instrument, 

including the right to foreclose its lien.’’ 

of amount due, as well as the 

breakdown of past payment application. 

Similarly, the Bureau understands the 

concerns about the complications 

involved in addressing consumers in 

bankruptcy, (including complicated 

accounting and rules on 

communication), but believes that the 

complexities of this scenario necessitate 

the information in the periodic 

statement being provided to the 

consumer. The Bureau understands that 

certain laws, such as the FDCPA or the 

Bankruptcy Code, may prevent attempts 

to collect a debt from a consumer in 

bankruptcy, but does not believe these 

laws prevent a servicer from sending a 

consumer a statement on the status of 

their loan. The final rule would allow 

servicers to make changes to the 

statement as they believe are necessary 

when a consumer is in bankruptcy; such 

servicers may include a message about 

the bankruptcy 125 and alternatively 

present the amount due to reflect the 

payment obligations determined by the 

individual bankruptcy proceeding. 

Finally, the Bureau carefully 

considered the comments requesting 

additional language on the effects of 

non-fully-amortizing payments. While 

the Bureau believes information 

explaining the different payment 

options may assist a consumer making 

a payment decision, the Bureau also 

notes that there is limited space on the 

periodic statement and that there is a 

risk of providing too much information 

that may overwhelm the consumer. The 

Bureau believes the proposed rule 

appropriately balances these concerns. 

For these reasons, the Bureau is 

adopting the proposed rule on 

explanation of amount due. 

41(d)(3) Past Payment Breakdown 

Proposed paragraph (d)(3) would have 

required periodic statements to include 

a snapshot of how past payments have 

been applied. Proposed 

§ 1026.41(d)(3)(i) would have required 

the periodic statement to include both 

the total of all payments received since 

the last statement and a breakdown of 

how those payments were applied to 

principal, interest, escrow, fees, and 

charges, and any partial payment or 

suspense account (if applicable). 

Proposed § 1026.41(d)(3)(ii) would have 

required the total of all payments 

received since the beginning of the 

calendar year and a breakdown of how 

those payments were applied to 

principal, interest, escrow, fees, and 

charges, as well as the amount currently 

held in any partial payment or suspense 

account (if applicable). This information 

would have had to be grouped together 

in close proximity, and located on the 

first page of the statement. 

Commenters expressed concern there 

may be operational difficulties in 

including the past payment breakdown 

on the periodic statement because not 

all servicer systems are set up to provide 

a breakdown of past payments, either 

for the past month or the year-to-date. 

This could be particularly difficult for 

daily simple interest loans, and 

precomputed loans. One commenter 

expressed concern that the year-to-date 

calculation could be difficult if a loan 

was transferred to that servicer during 

the course of that year. 

Commenters questioned the value of 

the past payment breakdown, stating 

that consumers are not concerned with 

the breakdown of their past payments, 

and that this information could be 

found in the loan documents. Further, 

some commenters who saw value in the 

breakdown of payments from the past 

month questioned the value of the 

additional breakdown of all payments 

from the year-to-date. They stated that 

this information is duplicative as well 

as available on request, that it may be 

difficult to fit such information on the 

periodic statement, that the benefits of 

providing such information do not 

outweigh the costs, and that this 

information could be particularly 

difficult to compute if the loan is 

delinquent. Finally, one commenter 

expressed concern that the year-to-date 

breakdown would cause confusion if 

payments have been placed in a 

suspense account, and asked the Bureau 

to provide clarity that it is permissible 

to provide an actual suspense account 

balance rather than the one calculated 

year-to-date. 

While the Bureau understands there 

may be some challenges in importing 

information on the past payment 

breakdown to the periodic statement, 

the Bureau notes that because the past 

payment has been applied, the servicer 

must have this information. The Bureau 

also considered the concerns expressed 

about daily simple interest loans or 

precomputed loans; however for the 

reasons discussed above in the sectionby-section analysis of explanation of 

amount due, the Bureau believes the 

breakdown of these loans can be 

disclosed on the periodic statement. The 

Bureau considered the concerns about 

calculating the year-to-date breakdown 

of loans which have been transferred 

from a previous servicer; however, the 

Bureau believes that all servicers should 

be able to accurately compute the yearto-date breakdown, and this information 

should transfer with the loan. Thus the 

Bureau does not believe that transfer of 

servicing will present a problem in 

providing the year-to-date breakdown. 

Further, the Bureau believes the past 

payment breakdown is an important 

disclosure on the periodic statement. 

This disclosure serves several purposes, 

including creating a record of payment 

application, providing the consumer 

information needed to assert any errors, 

and providing information about the 

mortgage expenses. The breakdown in 

§ 1026.41(d)(3)(i), showing all payments 

made since the last statement, would 

allow consumers to confirm that their 

payments were properly applied. If the 

payments were not properly applied, 

the breakdown would provide 

consumers the information needed to 

assert an error. 

Both the breakdown since the last 

billing cycle and the breakdown of the 

year-to-date play an important role in 

educating the consumer. The payments 

since the last statement inform 

consumers of how much their 

outstanding principal has decreased, 

while the year-to-date information 

educates consumers on the costs of their 

mortgage loan. Consumer testing 

revealed that testing participants were 

surprised by how much of their 

payment is going to interest or fees as 

opposed to principal. Aggregation over 

the year-to-date can bring this expense 

to a consumer’s attention, and motivate 

them to possibly change behaviors that 

are generating significant expenses. For 

example, consumers who habitually 

submit their payment a few days late 

may correct this behavior if they realize 

it is costing them hundreds of dollars a 

year. The breakdown of all payments 

made in the current calendar year-todate is of particular importance in 

educating consumers about their loans, 

as there is no other mandated year-end 

summary of all payments received and 

their application. The past payment 

breakdown, of both the payments since 

the last statement and payments for the 

year-to-date, provides the consumer 

with important information that is not 

currently required to be disclosed. 

Finally, the Bureau considered the 

concerns about disclosing suspense 

account information. Proposed 

comment 41(d)(3)–1 would have 

provided guidance on how partial 

payments that have been sent to a 

suspense account should be reflected in 

the past payments breakdown section of 

the periodic statement. The proposed 

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126Macro Report, at 11. 

comment provides illustrative examples 

of how partial payments sent to a 

suspense account should be listed as 

unapplied funds since the last statement 

and year to date. This comment shows 

the breakdown should disclose both the 

amount of funds that were sent to a 

suspense account during the time 

reflected by the periodic statement, as 

well as the total amount currently held 

in the suspense account. The Bureau 

believes this addresses the concerns 

about displaying suspense account 

information. Consumer testing revealed 

that testing participants had very little 

understanding about how partial 

payments are handled.126 As discussed 

above, the periodic statement is 

designed to help consumers understand 

how partial payments are processed. 

The past payment breakdown is useful 

in communicating information about 

partial payments and suspense accounts 

to consumers. For these reasons, the 

Bureau is finalizing the proposed 

provisions on the past payment 

breakdown. 

41(d)(4) Transaction Activity 

Proposed § 1026.41(d)(4) would have 

required the periodic statement to 

include a transaction activity section 

that lists any activity since the last 

statement that credits or debits the 

outstanding account balance. For each 

transaction, the statement would 

include the date of the transaction, a 

description of the transaction, and the 

amount of the transaction. This 

information must be grouped together, 

but may be provided anywhere on the 

statement. 

Proposed comment 41(d)(4)–1 

clarified that transaction activity 

includes any activity that credits or 

debits the outstanding loan balance. For 

example, proposed comment 41(d)(4)–1 

stated that transaction activity would 

include, without limitation, payments 

received and applied, payments 

received and sent to a suspense account, 

and the imposition of any fee or charge. 

Thus, the transaction activity section 

would have provided a list of all charges 

and payments, covering the time from 

the last statement until the current 

statement is printed. This disclosure 

would allow the consumer to 

understand what charges are being 

imposed and provide further detail 

regarding the aggregated numbers found 

in the ‘‘explanation of amount due’’ 

section. The transaction activity section 

would provide a record of the account 

since the last statement, allowing the 

consumer to review for errors, ensure 

payments were received, and 

understand any and all costs. If a 

servicer receives a partial payment and 

decides to return the payment to the 

consumer, such a payment would not 

need to be included as a line item in the 

transaction activity section, because this 

activity would neither credit nor debit 

the outstanding account balance. For 

additional clarity, the Bureau has 

amended the language in the final rule 

to state that transaction activity includes 

any transaction that credits or debits the 

amount currently due, and has amended 

comment 41(d)(4)–1 to clarify this is the 

amount referred to by 

§ 1026.41(d)(1)(iii). 

Proposed comment 41(d)(4)–2 

clarified that the description of any late 

fee charge in the transaction activity 

section includes the date of the late fee, 

the amount of the late fee, and the fact 

that a late fee was imposed. Proposed 

comment 41(d)(4)–3 clarified that if a 

partial payment is sent to a suspense 

account, the fact of the transfer should 

be reflected in the transaction 

description (for example, a partial 

payment entry in the transaction 

activity might read: ‘‘Partial payment 

sent to suspense account’’), the funds 

sent to the suspense account should be 

reflected in the unapplied funds section 

of the past payment breakdown, and an 

explanation of what must be done to 

release the funds must be provided in 

the messages section. The messages 

section, discussed below, would have 

included an explanation of what the 

consumer must do to release the funds 

from the suspense account. 

Comments on transaction activity 

focused on what must be disclosed, and 

the logistics of fitting this information 

on the periodic statement. Commenters 

had questions about what items should 

be included on this list, asking if a 

charge is entered and reversed in the 

same month, may it be excluded; and, 

if funds sent to a suspense account must 

be listed on the transaction activity list 

(and noting a potential inconsistency 

with the National Mortgage Settlement 

on this point). One commenter also 

stated that servicers may not know 

third-party fees at the time they produce 

the periodic statement. Commenters 

also addressed the listing of fees: One 

commenter stated it might be difficult to 

list all the fees that are imposed, while 

a consumer advocate emphasized the 

importance of listing all the fees that 

were imposed. One commenter 

requested that sufficient information be 

given in the transaction item line such 

that the consumer could validate the 

charge. Another commenter expressed 

concern about being able to fit the entire 

list of transactions on the first page of 

the periodic statement. Finally, a 

commenter sought clarification on how 

corrections to errors on prior statements 

can be displayed. 

In response to the questions received, 

the Bureau notes that if a charge is 

entered and reversed in the same 

month, it would not affect the amount 

of the consumer’s outstanding balance 

and both line items may be left off the 

transaction activity. Funds sent to a 

suspense account must be included in 

the transaction activity; it is essential for 

the consumer to know these funds were 

received by the servicer. If a servicer 

does not know the amount of a thirdparty fee, it cannot bill the consumer for 

that fee. When the servicer bills the 

consumer (and thus knows the exact 

amount of the fee), that fee should be 

included in the transaction activity. 

While the Bureau notes it may be 

difficult to list all the fees that are 

imposed, the Bureau believes it is 

essential for the consumer to have an 

accounting of any fee that is imposed. 

Further, the transaction description 

should include sufficient information 

such that the consumer can determine 

why the charge is imposed. Servicers 

may use any reasonable method for 

correcting errors; for example, they 

could use a new line item which 

explains the correction. Finally, the 

Bureau notes the transaction activity is 

not required to be on the first page, and 

servicers may use additional pages if 

necessary. For these reasons, the Bureau 

is finalizing the proposed provisions on 

the transaction activity. 

41(d)(5) Partial Payment Information 

Proposed § 1026.41(d)(5) would have 

required a message on the front of the 

statement if a partial payment of funds 

is being held in a suspense account 

regarding what must be done for the 

funds to be applied. The Bureau sought 

comment on what, if any, additional 

messages should be required. 

Partial Payment Disclosure 

Some commenters appreciated the 

clarification of suspense account 

information for consumers, while other 

commenters felt this was unnecessary 

and difficult to achieve. Two 

commenters suggested that there was 

not sufficient space on the periodic 

statement to explain the suspense 

account and requested the information 

be included in a separate letter. One 

commenter suggested the consumer 

should receive disclosures during the 

life of the loan, specifically annual 

notices during the first three years of the 

loan. 

While the Bureau does not believe it 

is appropriate to require servicers to 

send an annual disclosure on the 

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127TILA section 128(f)(1)(E) also requires a 

‘‘description of any late payment fees.’’ As noted 

above, the Bureau is requiring this information to 

be disclosed in the ‘‘amount due’’ section of the 

periodic statement. See § 1026.41(d)(1). 

128One commenter objected to the disclosure of 

the maturity date, saying that consumers are 

generally not interested and that few consumers 

suspense account procedures for the 

first three years, the Bureau 

acknowledges that information on the 

suspense account may be better 

disclosed in a separate letter. Thus, the 

Bureau is modifying the rule to provide 

that if funds are being held in a 

suspense account, the amount held in 

any suspense account must be disclosed 

in the past payment breakdown on the 

periodic statement, but the servicer may 

move the message about what must be 

done for the funds to be applied to a 

separate page of the statement, or may 

send this disclosure as a separate letter. 

The servicer still has the option of 

including this disclosure on the 

periodic statement itself. The final rule 

reflects this additional flexibility. If the 

servicer has the benefit of the small 

servicer exemption in § 1026.41(e)(4), 

the servicer need not send this separate 

letter. 

Additional Messages 

Some commenters expressed concerns 

about the logistics of including a 

messages box on the periodic statement. 

These commenters explained that 

dynamic information created 

operational difficulties for the creation 

of the periodic statement. Commenters 

had mixed responses to any additional 

dynamic messages that should be 

required. Some commenters specifically 

said there should be no additional 

messages because this might distract the 

consumer from other important 

information. Several commenters 

suggested the periodic statement should 

be required to include additional 

information on escrow accounts, but 

one commenter argued that a complete 

escrow breakdown is already provided 

annually under RESPA, and questioned 

if this additional information would 

help consumers. Commenters also 

suggested additional information about 

force-placed insurance should be 

included on the periodic statement. One 

commenter urged the Bureau to require 

servicers to include force-placed 

insurance charges in regular invoice 

statements that are sent to a consumer 

so that a consumer is constantly 

reminded of how much of their 

payments are going toward paying for 

such insurance. Another consumer 

group submitted similar comments 

recommending that the Bureau require 

servicers to identify force-placed 

insurance charges specifically in 

proposed periodic statements so that 

consumers could easily recognize when 

force-placed insurance has been 

obtained. Finally, one commenter 

recommended a message about 

consumers’ obligations to pay 

community assessments. 

The Bureau carefully considered 

requiring additional messages, but 

decided that none should be required, 

particularly in light of the additional 

burden this dynamic feature would add 

to the periodic statement. The Bureau 

believes that the additional escrow 

information is provided through the 

annual escrow disclosure, and that 

monthly escrow information would be 

confusing because, although escrow 

accrues monthly, payments are often 

made at discrete times throughout the 

year to pay taxes and insurance 

premiums. Additionally, the amount 

paid into escrow will be shown each 

month. The Bureau believes that 

sufficient information on force-placed 

insurance is provided through the final 

rule. Charges for force-placed insurance, 

like any other charge, must be listed in 

the transaction activity section of the 

periodic statement. Further, detailed 

notification about force-placed 

insurance is included in the disclosures 

required by the force-placed insurance 

provisions of the 2013 RESPA Servicing 

Final Rule. Finally the Bureau believes 

the suggested message on community 

assessment obligations would be 

inappropriate due to the relatively low 

benefit this message would provide to 

consumers, and the relatively high costs 

to servicers of determining and tracking 

which consumers are members of 

community associations. 

41(d)(6) Contact Information 

Proposed § 1026.41(d)(6) would have 

required that the periodic statement 

contain contact information specifying 

where a consumer may obtain 

information regarding the mortgage. 

Proposed comment 41(d)(6)–2 clarified 

that this contact information must be 

the same as the contact information for 

asserting errors or requesting 

information. Proposed § 1026.41(d)(6) 

provided that the contact information 

provided must include a toll-free 

telephone number. Proposed comment 

41(d)(6)–1 clarified that the servicer 

may provide additional information, 

such as a Web address, at its option. 

Proposed § 1026.41(d)(6) did not require 

that that the contact information be set 

off in a separate section, but simply that 

it be included on the front page of the 

statement. This proposed requirement 

would have allowed servicers to include 

this information with their company 

name and logo at the top of the page or 

elsewhere on the statement. 

Comments on the contact information 

focused on concerns about disclosing 

the number associated with the oral 

error resolution procedures in the 2012 

RESPA Servicing Proposal. 

Additionally, one commenter requested 

that in place of a toll-free number, 

servicers be allowed to provide a 

number where the consumer can contact 

the servicer at no cost. 

Because the proposed oral error 

resolution procedures are not being 

finalized, proposed comment 41(d)(6)–2 

has been removed from the provision 

requiring the contact information. The 

Bureau believes it is important for 

consumers to be able to request 

information or report errors without 

incurring a fee, and that it is consistent 

with standard industry practice to 

provide a toll-free phone number. The 

Bureau determined that proposed 

comment 41(d)(6)–1 provided minimal 

guidance; thus, this comment is not 

being finalized. The proposed rule is 

being adopted, subject to these 

modifications. 

41(d)(7) Account Information 

Proposed § 1026.41(d)(7) would have 

required that the following information 

about the mortgage, as required by TILA 

section 128(f)(1), be included on the 

statement: The amount of the principal 

obligation, the current interest rate in 

effect for the loan, the date on which the 

interest rate may next reset or adjust, the 

amount of any prepayment penalty, and 

information on homeownership 

counselors and counseling 

organizations.127 This information may 

be included anywhere on the statement. 

This information may, but need not be, 

grouped together. While the sample 

forms display this information on the 

first page, the servicer is not required to 

include this information on the first 

page. 

Overall, commenters focused on the 

disclosure of prepayment penalty 

information and homeownership 

counselor information, as discussed 

below. Additionally, some commenters 

stated that the disclosure of basic 

account information was unnecessary. 

Certain commenters objected to the 

inclusion of information that would also 

be provided in other disclosures. In 

particular, they stated the date on which 

the interest rate will next reset is 

already on the § 1026.20(c) and 20(d) 

notices (discussed above in the sectionby-section analysis of § 1026.20(c)), as is 

the prepayment penalty disclosure, and 

that the outstanding balance, interest 

rate, and late fees are included in the 

loan documents.128 Commenters 

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keep their loans up to the full maturity date. The 

Bureau notes that neither the proposed rule nor the 

final rule requires disclosure of the maturity date 

of the loan on the periodic statement. 

129This change is made to conform with the 

§ 1026.20(c) and (d) ARM disclosures. 

130See 2012 HOEPA Proposal, 77 FR 49090, 

49097–99 (Aug. 15, 2012). 

131The list provided by the lender pursuant to the 

2013 HOEPA Final Rule would include only 

homeownership counselors or counseling 

organizations from either the most current list of 

homeownership counselors or counseling 

Continued 

pointed out that including the account 

information may require programing 

changes, and distract from other more 

important information on the statement. 

The Bureau acknowledges that while 

some of this information may be 

available in other documents, some of 

these documents may not be easily 

accessible to the consumer. The Bureau 

believes that one of the purposes of the 

periodic statement is to serve as a 

dashboard for the consumer, bringing 

together important information into a 

single location. Reminding the 

consumer of this information on a 

recurring basis, including particularly 

the date of an interest rate reset, can 

help consumers plan their affairs before 

receiving the notice of a reset. The 

Bureau believes the consumer 

protection benefits of these disclosures 

outweigh the costs of potential 

duplication, and thus the Bureau is 

finalizing the proposed provisions 

requiring disclosure of: The date the 

interest rate will next reset, the 

outstanding balance, the current interest 

rate, and the prepayment penalty 

(modified to require the existence rather 

than the amount of such penalty). For 

these reasons, the Bureau is adopting 

the proposed rule on account 

information as final with the minor 

change that § 1026.41(d)(7)(iii) now 

requires the date after which the interest 

rate may next change,129 and subject to 

the modifications to the prepayment 

penalty and homeownership counselor 

disclosures discussed below. 

Prepayment penalty. Proposed 

§ 1026.41(d)(7)(iv) would have required 

the periodic statement to disclose the 

amount of any prepayment penalty, and 

defined a prepayment penalty as ‘‘a 

charge imposed for paying all or part of 

a transaction’s principal before the date 

on which the principal is due.’’ This 

definition was further clarified in the 

proposed commentary, and 

substantially incorporated the 

definitions of and guidance on 

prepayment penalties from other 

rulemakings addressing mortgages and, 

as necessary, reconciled their 

differences. The Bureau coordinated the 

definition of the term prepayment 

penalty in proposed § 1026.41(d)(7)(iv) 

with the definitions in other pending 

rulemakings relating to mortgages. 

Commenters had two major concerns 

with the prepayment penalty 

provision—disclosing the amount of the 

penalty, and the definition of a penalty. 

First, a number of commenters 

expressed concern over difficulties in 

calculating and providing the amount of 

the prepayment penalty. These 

commenters explained that the amount 

is determined by a number of dynamic 

factors, and is often computed by hand. 

Further, this information may be stored 

in a separate system. These commenters 

suggested the periodic statement 

disclose the existence of a prepayment 

penalty, with a note to call for the 

amount, rather than the amount of the 

prepayment penalty. Next, several 

commenters raised concerns about 

including in the definition of 

prepayment penalty FHA interest 

accrual amortization payments (the FHA 

requirement that interest be paid for a 

full month if the loan is paid off on the 

first day of the month) and closing costs 

reimbursed to the lender for early 

payoff. Finally, commenters stated that 

this information should not be included 

in the periodic statement because it 

would be inaccurate, it is only relevant 

to certain consumers, and consumers 

have not requested it. 

The Bureau carefully considered the 

concerns about providing the amount of 

the prepayment penalty. The exact 

amount of the prepayment penalty 

provides value only to consumers 

considering refinancing or otherwise 

paying off their loan. Only a fraction of 

the consumers who receive the periodic 

statement will be considering this and 

will need the exact amount. Such 

consumers could contact their servicer 

and, using the information request 

procedures in the 2013 RESPA 

Servicing Final Rule, request the exact 

amount of the prepayment penalty. 

Requiring the servicer to disclose the 

existence of the prepayment penalty, 

rather than the amount, would be far 

less burdensome to servicers; 

additionally this modification would 

result in only a minimal decrease in 

consumer protection. Thus, the Bureau 

is making this modification to the final 

rule. 

Additionally, the Bureau considered 

the definition of the prepayment 

penalty. The other proposals related to 

the Title XIV Rulemakings proposed the 

same definition of prepayment penalty 

and received comments raising the same 

concerns about the definition of 

prepayment penalty as the comments in 

response to the 2012 TILA Servicing 

Proposal. The definition of a 

prepayment penalty has been 

coordinated across the Title XIV 

Rulemakings and was in the 2013 ATR 

Final Rule. In the interest of consistency 

across the Title XIV Rulemakings, the 

2013 TILA Servicing Final Rule cites to 

the definition of prepayment penalty 

found in the 2013 ATR Final Rule, 

rather than re-define prepayment 

penalty or offer an alternative definition 

of prepayment penalty. The final rule 

includes this modification; accordingly, 

as the comments to the prepayment 

definition are found in the commentary 

to the 2013 ATR Final Rule, the 

duplicative commentary to 

§ 1026.41(d)(7)(iv) has not been 

finalized. 

Legal authority. TILA section 

128(f)(1)(D) requires the periodic 

statement to include the amount of any 

prepayment penalty that may be 

charged. For the reasons discussed 

above, the Bureau is using its authority 

under TILA section 105(a) and (f) to 

exempt servicers from having to include 

this information in periodic statements 

and to instead require the periodic 

statement to include the existence of 

any prepayment penalty. This 

adjustment is additionally authorized 

under Dodd-Frank Act section 1405(b). 

Homeownership Counselors and 

Counseling Organizations 

TILA section 128(f)(1)(G) requires the 

periodic statement to include the name, 

addresses, telephone numbers, and 

Internet addresses of counseling 

agencies or programs reasonably 

available to the consumer that have 

been certified or approved and made 

publically available by the Secretary of 

HUD or a State housing finance 

authority. 

On July 9, 2012, the Bureau released 

the 2012 HOEPA Proposal to implement 

other Dodd-Frank Act provisions, 

including the requirement to provide a 

list of homeownership counselors and 

counseling organizations during the 

application process for mortgage loan. 

To facilitate compliance, the Bureau 

proposed to require creditors to provide 

a list of five homeownership counselors 

or counseling organizations to 

applicants for various categories of 

mortgage loans.130 The Bureau also 

stated that it is expecting to develop a 

Web site portal that would allow 

lenders to type in the loan applicant’s 

zip code to generate the requisite list, 

which could then be printed for 

distribution to the loan applicant. This 

will allow creditors to access lists of the 

homeownership counselors and 

counseling organizations with a 

minimum amount of effort.131

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organizations made available by the Bureau for use 

by lenders, or the most current list maintained by 

HUD of homeownership counselors or counseling 

organizations certified by HUD, or otherwise 

approved by HUD. See 77 FR 49090, 49098. 

132At the time of publication, the Bureau list was 

not yet available and the HUD list is available at 

http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm. 

In connection with the periodic 

statement requirement, however, the 

Bureau proposed to use its exception 

authority to require servicers simply to 

list where consumers can find a list of 

counselors, rather than to reproduce a 

list of counselors in each billing cycle. 

Proposed § 1026.41(d)(7)(v) would have 

required the periodic statement to 

include contact information for any 

State housing finance authority for the 

State in which the property is located, 

and information enabling the consumer 

to access either the Bureau or the HUD 

list of homeownership counselors and 

counseling organizations. The Bureau 

suggested that this approach may 

appropriately balance consumer and 

servicer interests based on several 

considerations. 

First, the Bureau was concerned about 

information overload for consumers. 

The periodic statement contains a 

significant amount of information 

already. While consumers who are 

deciding whether to take out a mortgage 

loan in the first instance may greatly 

benefit from consultation with a 

homeownership counselor, that 

likelihood is greatly reduced with 

regard to consumers receiving regular 

periodic statements on existing loans. 

Second, the burden on servicers to 

import the list of counselors into a 

periodic statement document or to 

attach a list each billing cycle would 

have been significantly higher than with 

the one-time requirement in the HOEPA 

rulemaking. Space on the periodic 

statements is limited, and importing 

updated information from the Bureau 

Web site each cycle would involve more 

programming burden than simply listing 

Web site information in the first 

instance. 

To address these concerns, the 

proposal would have required that the 

periodic statements include the contact 

information to access the State housing 

finance authority for the State in which 

the property is located, and the Web site 

and telephone number to access either 

the Bureau list or the HUD list of 

homeownership counselors and 

counseling organizations.132 Directing 

consumers to this information would 

allow them to choose a program or 

agency conveniently located for them, 

and would allow consumers to locate 

other programs or agencies if those 

contacted initially could not help them 

at that time. 

The Bureau coordinated the 

homeownership counselor information 

requirement in § 1026.41(d)(7)(v) with 

the other pending rulemakings 

concerning mortgage loans that address 

homeownership counselors. The Bureau 

believes that, to the extent doing so is 

consistent with consumer protection 

objectives, adopting a consistent 

approach to providing homeownership 

counselor information across its various 

pending rulemakings will facilitate 

compliance. 

Overall, commenters praised the 

Bureau’s proposal on providing Web 

site information, rather than individual 

homeownership counselors and 

counseling organizations. However, 

commenters had remaining concerns 

about providing information for the 

relevant State housing finance authority 

in addition to information on how to 

access the HUD list or the Bureau list. 

Finally, the Bureau received comments 

from the National Council of State 

Housing Agencies, expressing concern 

about including contact information for 

State housing finance authorities on the 

periodic statements. The Council stated 

that, while the State housing agencies 

will always be willing to assist 

struggling homeowners, including their 

contact information on the periodic 

statement may increase consumer 

confusion by misdirecting consumers 

away from entities more likely to be able 

to assist them. The Council stated that 

not all State housing agencies offer 

counseling programs and, because of 

limited resources, State housing 

agencies may not be well-equipped to 

handle the increased number of 

inquiries they would receive. 

Additional comments focused on the 

difficulty of providing information for 

the individual State authority, and 

reconciling which state’s authority 

should be provided. Several 

commenters stated that it would be 

difficult to have information for 

different State authorities appear on 

different statements, and asked if they 

could provide contact information to a 

location where a consumer could find a 

list of all the State housing finance 

authorities. Additionally, some 

commenters expressed concern about 

the inconsistency between the periodic 

statement disclosure and the 

§ 1026.20(d) ARM initial interest rate 

reset disclosure. While the periodic 

statement would have required 

disclosure of the State housing finance 

authority for the State in which the 

property is located, the § 1026.20(d) 

ARM disclosure would have required 

the State authority for the State in which 

the consumer has primary residence. 

Commenters expressed concern this 

would create difficulties and asked that 

these discrepancies be reconciled or, as 

above, that they be allowed to provide 

a link to a full list of the State housing 

finance authorities. 

The Bureau carefully considered the 

comments expressing concern about 

providing the contact information of the 

correct State housing finance authority, 

particularly the comment from the State 

housing finance authority association 

expressing this concern. These 

comments were also raised in 

connection with the § 1026.20(d) ARM 

initial interest rate adjustment 

disclosure. As discussed above in the 

section-by-section analysis of 

§ 1026.20(d), requiring the contact 

information for the individual State 

housing finance authority provides 

minimal benefit to the consumer 

(because not all State housing finance 

authorities provide counseling, and this 

information is available elsewhere), and 

imposes a large burden on the servicer 

(i.e., determining which State housing 

finance authority’s information should 

be included, and including dynamic 

information on the statement). For these 

reasons, the Bureau is removing the 

requirement to disclose contact 

information for the State housing 

finance authority for the State in which 

the property is located. 

Legal authority. The Bureau uses its 

authority under TILA section 105(a) and 

(f) and Dodd-Frank Act section 1405(b) 

to exempt creditors, assignees, and 

servicers of residential mortgage loans 

from the requirement in TILA section 

128(f)(1)(G) to include in periodic 

statements contact information for 

government-certified counseling 

agencies or programs reasonably 

available to the consumer (i.e., State 

Housing Finance Authorities), and to 

instead require that periodic statements 

disclose information enabling the 

consumer to access either the Bureau 

list or HUD list of homeownership 

counselors and organizations. For the 

reasons discussed above, the Bureau 

believes that this exception and 

addition are necessary and proper under 

TILA section 105(a) both to effectuate 

the purposes of TILA—to promote the 

informed use of credit and protect 

consumers against inaccurate and unfair 

credit billing practices—and to facilitate 

compliance. Moreover, the Bureau 

believes, in light of the factors in TILA 

section 105(f), that disclosure of the 

information specified in TILA section 

128(f)(1)(G) would not provide a 

meaningful benefit to consumers. 

Specifically, the Bureau considers that 

the exemption is proper irrespective of 

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the amount of the loan, the status of the 

consumer (including related financial 

arrangements, financial sophistication, 

and the importance to the consumer of 

the loan), or whether the loan is secured 

by the principal residence of the 

consumer. Further, the Bureau believes 

that the exemption will simplify the 

periodic statement, and improve the 

homeownership counselor information 

provided to the consumer, thus 

furthering the consumer protection 

purposes of the statute. In addition, 

consistent with Dodd-Frank Act section 

1405(b), the Bureau believes that the 

modification of the requirements in 

TILA section 128(f)(1)(G) will improve 

consumer awareness and understanding 

and is in the interest of consumers and 

in the public interest. 

41(d)(8) Delinquency Information 

Proposed § 1026.41(d)(8) would have 

required that if the consumer is more 

than 45 days delinquent, the servicer 

must include on the periodic statement 

certain delinquency information 

grouped together. The accounting of 

mortgage payments is confusing at best, 

and becomes significantly more 

complicated when the loan is 

delinquent. The combination of fees, 

partial payments being sent to suspense 

accounts, and application of payments 

to the outstanding amounts due can 

quickly lead to confusion. The early 

intervention provisions of the 2013 

RESPA Servicing Final Rule require 

servicers to disclose information about 

loss mitigation or loan modification, but 

this information is not customized to 

individual consumers. The proposed 

delinquency notice on the periodic 

statement, discussed below, would have 

provided information that is tailored to 

the specific consumer. This information 

would have benefited the consumer in 

several ways. 

First, this notice would have ensured 

that the consumer is aware of the 

delinquency as well as potential 

consequences. Second, this information 

would have ensured that the consumer 

has the information specific to his or her 

loan. For example, certain loan 

modification programs are tied to 

specific timelines in delinquency. This 

delinquency information would ensure 

that consumers understand the 

timelines so they can benefit from the 

programs. Finally, the delinquency 

information would have created a 

record of how payments were applied, 

which would both help consumers 

understand the amount due and give 

consumers the information needed to 

become aware of any errors so they 

could use the appropriate error 

resolution procedures. The proposed 

rule would have required the following 

information: 

• Delinquency date and risks. 

Proposed § 1026.41(d)(8)(i) would have 

required the periodic statement to 

include the date on which the consumer 

became delinquent. Many timelines 

relevant to the loss mitigation and 

foreclosure processes are based on the 

number of days of delinquency. For 

example, under certain programs 

consumers may not be eligible for a loan 

modification unless they are at least 60 

days delinquent. However, a consumer 

may not know the date on which he or 

she was first considered delinquent. 

This can be especially confusing in a 

scenario where the consumer is making 

partial payments. Proposed 

§ 1026.41(d)(8)(ii) would have required 

the periodic statement to include a 

statement reminding the consumer of 

potential risks of delinquency, for 

example, that late fees may be assessed 

or, after a number of months, the 

consumer can be subject to foreclosure. 

• A recent account history. Proposed 

§ 1026.41(d)(8)(iii) would have required 

the periodic statement to include a 

recent account history as part of the 

delinquency information. The 

accounting associated with mortgage 

loan payments is complicated, and can 

be even more so in delinquency 

situations. The accrual of fees and the 

application of payments to past months 

can make it very difficult for a consumer 

to understand the exact amount he or 

she owes on the loan, and how that total 

was calculated. Additionally, this 

complex accounting makes it very 

difficult for a consumer to identify 

errors in payment allocations. Although 

some of this information would be 

available from previous periodic 

statements, the Bureau believed that 

providing a separate recent account 

history is warranted under the 

circumstances. 

The Bureau further believed that the 

recent account history would enable the 

consumer to understand how past 

payments were applied, provide the 

information needed to identify any 

errors, and provide the information 

necessary to make financial decisions. 

Proposed § 1026.41(d)(8)(iii) would 

have required the account history to 

show the amount due for each billing 

cycle, or the date on which a payment 

for a billing cycle was considered fully 

paid. The date on which the payment 

was considered fully paid was included 

to help a consumer understand that a 

past payment that was previously 

delinquent has been considered paid. 

For example, suppose a delinquent 

consumer does not make a payment in 

January, but makes a regular payment in 

February. Without the account history, 

the consumer would not be able to 

verify that payments were properly 

applied. The account history is limited 

to the lesser of the past six months or 

the last time the account was current to 

avoid creating a long list that could 

overwhelm the rest of the periodic 

statement. 

• Notice of any loan modification 

programs. Proposed § 1026.41(d)(8)(iv) 

would have required the periodic 

statement to include as part of the 

delinquency information notice of any 

acceptance into a modification program, 

either trial or permanent, to create a 

record of acceptance into the 

modification program. For consistency 

with the loss mitigation provisions of 

the 2013 RESPA Servicing Final Rule, 

the final rule amends this to require 

notice of a loss mitigation program to 

which a consumer has agreed. 

• Notice if the loan has been referred 

to foreclosure. Proposed 

§ 1026.41(d)(8)(v) would have required 

the periodic statement to include, as 

part of the delinquency information 

notice, that the loan has been referred to 

foreclosure, if applicable, to ensure that 

the consumer is aware of any pending 

foreclosure. For consistency with the 

loss mitigation provisions of the 2013 

RESPA Servicing Final Rule, the final 

rule amends this to require notice of the 

first notice or filing required by 

applicable law for any judicial or nonjudicial foreclosure process. 

• Total amount to bring the loan 

current. Proposed § 1026.41(d)(8)(vi) 

would have required that the total 

amount needed to bring the loan current 

be included in the delinquency 

information to ensure that consumers 

know how much money they must pay 

to bring the loan back to current status. 

• Homeownership counselor 

information reference. Proposed 

§ 1026.41(d)(8)(vii) would have required 

that the delinquency notice also contain 

a statement directing the consumer to 

the homeownership counselor 

information located on the statement, as 

proposed by § 1026.41(d)(7)(v). For 

example, if the homeownership 

counselor information is on the back of 

the statement, the delinquency 

information on the front of the 

statement would direct consumers to 

the back of the statement. 

The delinquency information was 

intended to assist consumers who have 

fallen behind on their mortgage 

payments. The proposal would not have 

required provision of this information 

until the consumer is 45 days 

delinquent. The Bureau recognized that 

not all delinquencies indicate troubled 

consumers; a single missed payment 

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133A servicer may believe foreclosure language is 

more appropriate later in the process when the 

servicer is preparing to file the first filing required 

for the foreclosure process. 

may be the result of other factors such 

as misdirected mail or inadvertence. 

Such consumers would likely be 

notified of a single missed payment by 

their servicer, and the missed payment 

would be reflected on the next periodic 

statement. These consumers would 

receive minimal additional benefit from 

the delinquency information and, if this 

is a frequent occurrence, such 

consumers might become accustomed to 

ignoring the delinquency information. 

By contrast, two missed payments likely 

indicate a potentially more serious 

issue. Thus, the delinquency 

information would have been required 

at 45 days to ensure receipt of this 

information by a consumer who missed 

two consecutive payments. 

Commenters expressed concern that a 

number of factors would make the 

proposed delinquency information 

difficult to implement, including the 

volume of loan-specific information that 

would have to be coded, the dynamic 

nature of the information, the fact that 

such information is often stored on 

multiple systems, the lack of space on 

the periodic statement, the difficulties 

in determining when a consumer was 

accepted into a loan modification 

program, and, as one commenter stated, 

the fact that the delinquency date 

calculation is a ‘‘nightmare.’’ 

Commenters also stated that the 

information in the delinquency notice 

would be unnecessary, as this 

information is already provided in 

investor-required notices, required by 

the Early Intervention provisions 

proposed in § 1024.39 and other 

provisions of the 2012 RESPA Servicing 

Proposal, the delinquency date is 

obvious, and the information is required 

in state-law notices in the foreclosure 

process. Some commenters went further 

to say this information should not be 

provided to the consumer, as the total 

outstanding balance may cause 

confusion or depress consumers, any 

mention of the risk of foreclosure may 

be considered notice of collection or 

default in violation of the FDCPA or 

other laws, and that 45 days is too short 

a timeline, such that habitually late 

payers will often receive these 

messages. One commenter suggested 60 

days would be a more appropriate 

timeline. Another commenter asked if 

the delinquency information must be 

provided once, or on each statement. 

Other commenters were supportive of 

the delinquency notice, and even 

suggested that more information be 

included. Such commenters said the 

account history should extend back 12 

months, rather than 6 months, there 

should be information on loss 

mitigation, there should be more 

information on the delinquent payment 

and the effect of delinquencies, and that 

payment history should be provided in 

excel format, mirroring current 

bankruptcy law. 

Finally, some commenters provided 

specific recommendations. Two 

commenters suggested the periodic 

statement note the fact that the loan is 

more than 45 days delinquent and 

request the consumer contact the 

servicer. Additionally, two commenters 

suggested this information might be 

better contained in a letter—one 

commenter suggested this should be in 

the breech letter or a right-to-cure, and 

the other suggested a payment history 

and explanation letter. Finally, one 

commenter suggested the delinquency 

notice be limited to past due amounts 

and the dates the payments were owed, 

and should only be provided up to the 

point of referral to foreclosure. 

The Bureau carefully considered the 

difficulties of implementing the 

delinquency information. The Bureau 

recognizes the difficulties of adding 

dynamic boxes to the periodic 

statement, and so—as in the case of the 

partial payment disclosure discussed 

above—is affording servicers the 

flexibility to provide the delinquency 

information on the periodic statement, 

on a separate page included with the 

periodic statement, or in a separate 

letter. 

The Bureau recognizes there is a large 

amount of loan specific data that may be 

included on separate systems; however, 

the Bureau notes the importance of 

bringing all this information together 

into one place for the consumer. The 

Bureau does not believe that any item of 

information required is unobtainable. In 

response to the comment that 

calculating the delinquency date can be 

a nightmare, the Bureau notes the 

confusion around this calculation is the 

very reason such a date should be 

included in the delinquency 

information. Finally, in response to 

concerns about determining the status of 

a loan modification program, the Bureau 

notes the 2013 RESPA Servicing Final 

Rule establishes procedures relating to 

loss mitigation, including identifying 

when a borrower has agreed to a loss 

mitigation program. 

The Bureau considered the comment 

that the delinquency information is 

unnecessary, but respectfully disagrees, 

in particular for the reasons expressed 

in the proposed rule and the supportive 

comments above. While the Bureau 

agrees that some of this information is 

available through other disclosures and 

in other locations, the Bureau believes 

it is important to bring this information 

together in a single place. In particular, 

while the Bureau acknowledges that 

delinquency information is provided in 

the early intervention notice required by 

the 2013 RESPA Servicing Final Rule, 

the Bureau notes that this information is 

generic, while the information in the 

periodic statement is specific to the 

individual loan. These two notices are 

designed to complement each other—for 

example, the early intervention notice 

information may discuss an option that 

is only available to consumers who are 

60 days delinquent, and the periodic 

statement information would inform an 

individual consumer of the exact date 

they were considered delinquent. The 

Bureau considered the comment that the 

total amount outstanding may depress 

or confuse consumers, but the Bureau 

believes the value of transparent 

disclosure of information outweighs 

such concerns. The Bureau considered 

the concerns that mentioning the risks 

of foreclosure may violate the FDCPA, 

but the Bureau notes that specific 

language is not required by the 

regulation—if a servicer feels that 

mention of foreclosure is inappropriate 

when a consumer is 45 days delinquent, 

at that time they could warn the 

consumer instead of the imposition of 

late fees.133 Finally, in response to the 

comments that 45 days is too early to 

require this disclosure, the Bureau notes 

that a 45 day delinquency corresponds 

to two missed payments. Delaying the 

delinquency notice to 60 days or more 

would mean a consumer would not 

receive this information until they had 

missed three payments. The Bureau 

notes the delinquency notice 

information complements the early 

intervention information, and that these 

notices should be provided on a similar 

timeframe. The Bureau notes the 

delinquency information must be 

provided on, or accompanying, each 

periodic statement sent when a 

consumer is at least 45 days delinquent. 

The Bureau notes that much of the 

information on the delinquency notice 

will change as time passes, and thus a 

single statement will quickly become 

outdated. 

The Bureau carefully considered the 

above recommendations to streamline 

the notice to delinquent consumers. The 

Bureau believes merely noting the 

delinquency and instructing the 

consumer to contact the servicer is 

insufficient; further this information 

(and more) is provided by the early 

intervention information required by the 

2013 RESPA Servicing Final Rule. The 

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goal of the enhanced and customized 

disclosures in the periodic statement is, 

in part, to provide delinquent 

consumers with additional information 

that might encourage them to contact 

their servicer. As discussed above, the 

Bureau believes the 45-day timeline is 

proper for the delinquency notice. The 

Bureau has adopted the proposed rule 

as final, with the additional flexibility of 

allowing such information to be 

contained on a separate page of the 

periodic statement, or in a separate 

letter. 

41(e) Exemptions 

41(e)(1) Reverse Mortgages 

Proposed § 1026.41(e)(1) would have 

exempted reverse mortgages, as defined 

by § 1026.33(a), from the periodic 

statement requirement. The Bureau 

proposed this exemption for reverse 

mortgages because the periodic 

statement requirement was designed for 

a traditional mortgage product. 

Information that would be relevant and 

useful on a reverse mortgage statement 

differs substantially from the 

information required on the periodic 

statement. Incorporating the unique 

aspects of a reverse mortgage into the 

periodic statement regulations would 

require significant alterations to the 

form and regulation. The Bureau 

believed that it is more appropriate to 

address consumer protections relating to 

reverse mortgages in a separate 

comprehensive rulemaking. 

The Bureau received few comments 

on reverse mortgages—two commenters 

suggested that reverse mortgages should 

not be exempted, a third commenter 

suggested that reverse mortgage with 

escrow accounts should be brought in, 

and one commenter specifically praised 

the reverse mortgage exemption. For the 

reasons expressed in the proposal, the 

Bureau believes the consumer 

protections relating to reverse mortgages 

would be more appropriately addressed 

in a separate comprehensive 

rulemaking. Thus, the Bureau is 

adopting the proposed rule exempting 

reverse mortgages. 

Legal Authority 

The Bureau uses its authority under 

TILA sections 105(a) and (f) and DoddFrank Act section 1405(b) to exempt 

reverse mortgages from the requirement 

in TILA section 128(f) to provide 

periodic statements. For the reasons 

discussed above, the Bureau believes 

the exemption is necessary and proper 

under TILA section 105(a) both to 

effectuate the purposes of TILA, and to 

facilitate compliance. 

Moreover, the Bureau believes, in 

light of the factors in TILA section 

105(f), that disclosure of the information 

specified in TILA section 128(f)(1) 

would not provide a meaningful benefit 

to consumers of reverse mortgages. 

Specifically, the Bureau considers that 

the exemption is proper irrespective of 

the amount of the loan, the status of the 

consumer (including related financial 

arrangements, financial sophistication, 

and the importance to the consumer of 

the loan), or whether the loan is secured 

by the principal residence of the 

consumer. Additionally, in the 

estimation of the Bureau, the exemption 

would further the consumer protection 

purposes of the statute by avoiding the 

consumer confusion that would result 

by applying the same disclosure 

requirements to reverse mortgages as 

other mortgages and leaving reverse 

mortgages to be addressed in a 

comprehensive reverse mortgage 

rulemaking. Further, consistent with 

Dodd-Frank Act section 1405(b), the 

Bureau believes that the modification of 

the requirements in TILA section 128(f) 

to exempt reverse mortgages would 

improve consumer awareness and 

understanding and is in the interest of 

consumers and in the public interest. 

41(e)(2) Timeshare Plans 

Proposed § 1026.41(e)(2) would have 

clarified that timeshare plans as defined 

by 11 U.S.C. 101 (53D) are exempt from 

the periodic statement requirement. 

TILA section 128(f) provides that the 

periodic statement requirement applies 

to residential mortgage loans. The 

definition of residential mortgage loans 

set forth in TILA section 103(cc)(5) 

specifies that timeshare plans do not fall 

under this definition. Because no 

comments were received on the 

proposed timeshare plan exemption, 

this provision is being finalized without 

any changes. 

41(e)(3) Coupon Book 

Proposed § 1026.41(e)(3) would have 

implemented the statutory exemption in 

TILA section 128(f)(3) for fixed-rate 

loans for which the servicer provides a 

coupon book containing substantially 

similar information as found in the 

periodic statement. The Bureau 

recognizes the value of the coupon book 

as striking a balance between ensuring 

consumers receive important 

information, and providing a low 

burden method for servicers to comply 

with the periodic statement 

requirements. As such, the Bureau 

sought to effectuate the coupon book 

exemption. The nature of a coupon book 

(both its smaller size and static nature) 

creates difficulties in including 

substantially similar information as 

would be on a periodic statement. The 

main problem is the static nature of a 

coupon book. Because a coupon book 

may cover an entire year or more, it 

cannot include information that changes 

on a monthly basis. By contrast, a 

periodic statement can provide dynamic 

information that changes on a monthly 

basis. To address this problem, the 

Bureau proposed an exemption 

requiring certain information in the 

coupon book, certain information to be 

made available upon request, and 

certain information to be provided at 

delinquency. 

Proposed comment 41(e)(3)–1 defined 

‘‘fixed-rate’’ by reference to 

§ 1026.18(s)(7)(iii), which defines 

‘‘fixed-rate mortgage’’ as a transaction 

secured by a dwelling that is not an 

adjustable-rate or a step-rate mortgage. 

Proposed comment 41(e)(3)–2 explained 

what a coupon book is. 

Information in the Coupon Book 

Proposed § 1026.41(e)(3)(i) would 

have required the following information 

to be included on each coupon within 

the book: The payment due date, the 

amount due, and the amount and date 

that any late fee will be incurred. In 

specifying the amount due on each 

coupon, servicers would assume that all 

prior payments have been paid in full. 

Proposed § 1026.41(e)(3)(ii) would 

have required the following information 

to be included in the coupon book itself, 

though it need not be on each coupon: 

The amount of the principal loan 

balance, the interest rate in effect for the 

loan, the date on which the interest rate 

may next change; the amount of any 

prepayment penalty that may be 

charged, the contact information for the 

servicer, and homeownership counselor 

information. Each of these items is 

discussed above in the section-bysection analysis of proposed 

§ 1026.41(d). The coupon book would 

also have been required to disclose 

information on how the consumer may 

obtain the dynamic information 

discussed below. The information 

described above may be, but is not 

required to be, included on each 

coupon. Instead, it may be included 

anywhere in the coupon book, including 

on the covers, or on filler pages, as 

explained by proposed comment 

41(e)(3)–3. Because the outstanding 

principal balance will typically change 

during the time period covered by the 

coupon book, proposed comment 

41(e)(3)–4 clarified that a coupon book 

need only include the outstanding 

principal balance at the beginning of 

that time period. 

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10974 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

134For example, paragraph 41(e)(3)(ii)(A) 

references the information required by paragraph 

41(d)(7), which includes prepayment penalty 

information. Whereas the proposed rule required 

disclosure of the amount of any prepayment 

penalty, the final rule requires disclosure only of 

the existence of such a penalty. Accordingly, under 

final paragraph 41(e)(3)(ii)(A), a coupon book must 

likewise include only information regarding the 

existence of a prepayment penalty. 

Information Made Available 

Due to the static nature of the coupon 

book, certain dynamic information that 

would have been required to be 

included on periodic statements could 

not have been included in coupon 

books. Thus, proposed 

§ 1026.41(e)(3)(iii) would have required 

that certain dynamic information be 

made available upon the consumer’s 

request. The servicer could provide the 

information orally, in writing, in person, 

or electronically, if the consumer 

consents. Proposed § 1026.41(e)(3)(iii) 

would have required the following 

dynamic information be made available 

to the consumer upon request: The 

monthly payment amount, including a 

breakdown showing how much, if any, 

will be allocated to principal, interest, 

and any escrow account; the total of fees 

or charges imposed since the last 

payment period; any payment amount 

past due; the total of all payments 

received since the beginning of the 

payment period, including a breakdown 

of how much, if any, of those payments 

was applied to principal, interest, 

escrow, fees and charges, and any 

partial payment suspense accounts; the 

total of all payments received since the 

beginning of the calendar year, 

including a breakdown of how much, if 

any, of those payments was applied to 

principal, interest, escrow, fees and 

charges, and how much is currently in 

any partial payment or suspense 

account; and a list of all the transaction 

activity (as defined in proposed 

comment 41(d)(4)–1) that occurred since 

the payment period. 

Many commenters praised the coupon 

book exemption and suggested it be 

finalized as proposed. Other 

commenters expressed concerns about 

requirements of the coupon book 

exemption, saying these requirements 

were too expansive. Finally commenters 

requested clarification as to what would 

trigger the requirement for servicers 

using coupon books to provide the 

information that is made available. 

The Bureau carefully considered the 

comments received on the coupon book 

exemption. As an initial matter, the 

Bureau clarifies the information made 

available under § 1026.41(e)(3)(iii). Such 

information would have to be provided 

to the consumer at the consumer’s 

request. The Bureau does not believe an 

excessive amount of information is 

required on the periodic statement, and 

for the reasons discussed above in the 

section-by-section analysis of 41(d), 

believes the required items of 

information should be disclosed to the 

consumer. However, in light of the 

difficulties of having dynamic 

information on a coupon book, the 

Bureau believes this information should 

be provided at the consumer’s request. 

Delinquency Information 

Proposed § 1026.41(e)(3)(iv) would 

have required that to qualify for the 

coupon book exception, the 

delinquency information required by 

proposed § 1026.41(d)(8), discussed 

above, must be sent to the consumer in 

writing for each billing cycle for which 

the consumer is more than 45 days 

delinquent at the beginning of the 

billing cycle. Due to the static nature of 

the coupon book, such information 

would likely have to be provided in a 

separate letter. Commenters expressed 

concern about the requirement to 

provide the delinquency information, 

saying this information would be 

difficult to provide, and unnecessary. 

The Bureau believes the delinquency 

information is even more important to a 

consumer who is not receiving periodic 

statements due to the coupon book 

exemption. Coupon books are generally 

only updated on an annual basis–a 

consumer who becomes delinquent 

during the year will not have any other 

guaranteed source of up-to-date 

information on the status of their loan 

of the type that those receiving periodic 

statements will receive under the rule. 

For these reasons, the Bureau is 

adopting the rule as proposed (subject to 

the modifications that have been made 

to the portions of § 1026.41(d) that are 

referenced in the coupon book 

exemption).134

Legal Authority 

The Bureau uses its authority under 

TILA section 105(a) to give effect to the 

coupon book exemption in TILA section 

128(f)(3). TILA section 128(f)(3) 

provides an exemption to the periodic 

statement for fixed-rate loans when a 

coupon book that contains substantially 

similar information to the periodic 

statement is provided. Using its 

authority under TILA section 

128(f)(1)(H), the Bureau has added 

certain dynamic items to the periodic 

statement that would be infeasible to 

include in a coupon book. The Bureau 

uses its TILA section 105(a) authority to 

permit use of a coupon book even where 

certain dynamic information is not 

included in the book so long as such 

information is made available at the 

consumer’s request. Additionally, the 

delinquency information must be 

provided in a separate letter when 

appropriate, as required by 

§ 1026.41(e)(3)(iv). The Bureau believes 

this exemption is necessary and proper 

to facilitate compliance. 

41(e)(4) Small Servicers 

Proposed paragraph (e)(4) would have 

exempted certain small servicers from 

the duty to provide periodic statements. 

The proposal defined ‘‘small servicer’’ 

as a servicer (i) who services 1,000 or 

fewer mortgage loans; and (ii) only 

services mortgage loans for which the 

servicer or an affiliate is the owner or 

assignee, or for which the servicer or an 

affiliate is the entity to whom the 

mortgage loan obligation was initially 

payable. 

The Bureau proposed this exemption 

after careful consideration of the 

benefits and burdens of the periodic 

statement requirement. The Bureau 

explained that it believed that the 

proposed periodic statement would 

have been helpful to consumers because 

it would have provided a wellintegrated communication that not only 

contains information about upcoming 

payments due, but also information 

about loan status, fees charged, past 

payment crediting, and potential 

resources and other useful information 

for consumers who have fallen behind 

in their payments. The Bureau believed 

that providing a single-integrated 

document, in place of a number of other 

communications that contain fragments 

of this information can be more efficient 

for consumers and servicers alike. And 

in light of the historic problems that 

have been reported in parts of the 

servicing industry, the periodic 

statement could be a useful tool for 

consumers to monitor their servicers’ 

performance and identify any issues or 

errors as soon as they occur. 

At the same time, the Bureau 

recognized that the servicing industry is 

not monolithic. Producing a periodic 

statement with the elements proposed 

in § 1026.41 requires sophisticated 

programming to place individualized 

information on each consumer’s 

statement for each billing cycle. The 

Bureau recognized that certain small 

servicers would likely have to rely on 

outside vendors to develop or modify 

existing systems to produce statements 

in compliance with the rule. As 

discussed further below, the Bureau 

received detailed information from the 

Small Business Review Panel process 

confirming the technological and 

operational challenges faced by small 

servicers, as well as postage and other 

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135See Lori J. Pinto et al., Prime Alliance Loan 

Servicing, Re-Thinking Loan Serving, at 8 (Apr. 

2010) (‘‘Pinto Paper’’), available at http://

cuinsight.com/media/doc/WhitePaper_CaseStudy/

wpcs_ReThinking_LoanServicing_May2010.pdf. 

136Small Business Review Panel Report, at 16–19. 

137Small Business Review Panel Report, at 16–19. 

138Small Business Review Panel Report, at 17. 

expenses that would be associated with 

providing periodic statements on an 

ongoing basis. Because small servicers 

maintain small portfolios, the Small 

Entity Representatives emphasized that 

they cannot spread fixed costs across a 

large number of loans the way that 

larger servicers can. 

Where small servicers already have 

incentives to provide high levels of 

customer contact and information, the 

Bureau explained that it believed that 

the circumstances may warrant 

exempting those servicers from 

complying with the periodic statement 

requirement. In particular, small 

servicers that make loans in their local 

communities and then either hold their 

loans in portfolio or retain the servicing 

rights have incentives to maintain 

‘‘high-touch,’’ customer-centric 

customer service models. Affirmative 

communications with consumers help 

such servicers (and their affiliates) to 

ensure loan performance, protect their 

reputations in their communities, and 

market other consumer financial 

products and services to the customers 

for whom they service mortgages.135

Because those servicers generally have a 

long-term relationship with the 

consumers, their incentives with regard 

to charging fees and other servicing 

practices may be more aligned with 

consumer interests. These motivations 

help to ensure a good relationship and 

incentivize good customer service— 

including making available information 

about upcoming payments, fees charged 

and payment history, as well as other 

information needed by distressed 

consumers. At the same time, 

consumers generally have easy access to 

these small, community-based servicers, 

to obtain any information they desire. 

In proposing the small servicer 

exemption, the Bureau believed that 

both of these conditions were necessary 

to warrant a possible exemption from 

the periodic statement rule—that is, that 

an exemption may be appropriate only 

for servicers that service a relatively 

small number of loans and originate the 

loans and retain either ownership or 

servicing rights. Larger servicers are 

likely to be much more reliant on, and 

sophisticated users of, computer 

technology to manage their operations 

efficiently. In such situations, 

implementation of the periodic 

statement requirement is likely to be 

somewhat easier to accomplish and 

perhaps even provide technological 

benefits for the servicers. Larger 

servicers also generally operate in a 

larger number of communities under 

circumstances in which the ‘‘high 

touch’’ model of customer service is not 

practicable. In light of this fact and the 

consumer benefits from integrated 

communications, the Bureau did not 

believe it would be appropriate to 

exempt all servicers who originate loans 

that they then hold in portfolio or with 

respect to which they retain ownership 

or servicing rights, without regard to 

size. 

The proposed exemption is consistent 

with feedback that the Bureau received 

from Small Entity Representatives 

during the Small Business Review Panel 

process regarding the potentially 

significant burdens that would be 

imposed by a periodic statement 

requirement. Participants explained that 

they already provide much of the 

information in the proposed periodic 

statement through alternative means, 

including correspondence, more limited 

periodic statements, coupon books, 

passbooks, and telephone 

conversations.136 According to the 

Small Entity Representatives, even 

where small servicers do not 

affirmatively provide particular items of 

information to consumers, they 

generally provide it on request. 

However, the participants emphasized 

repeatedly that consolidating all of the 

information into a single monthly 

dynamic statement would be difficult 

for small servicers.137

The Small Entity Representatives 

explained that, due to their small size, 

they generally do not maintain in-house 

technological expertise and would 

generally use third-party vendors to 

develop periodic statements. Due to 

their small size, they believed they 

would have no control over these 

vendor costs.138 Additionally, the small 

servicers have smaller portfolios over 

which to spread the fixed costs of 

producing periodic statements. Such 

servicers stated they are unable to gain 

cost efficiencies and cannot effectively 

spread the implementation costs of 

periodic statements across their loan 

portfolios. Finally, several Small Entity 

Representatives stated that mailing 

periodic statements could cost 

thousands of dollars per month beyond 

some of their current alternative 

communication channels, such as 

coupon books or passbooks. 

Small Servicer Defined 

At the time of the proposal, the 

Bureau had only roughly estimated the 

amount of burden that would be 

imposed by the periodic statement 

requirement on servicers of different 

sizes. However, the Bureau believed that 

a threshold of 1,000 loans serviced may 

be an appropriate approximation to 

limit the proposed exemption to smaller 

servicers in the market. 

In addition to the 1,000 loan 

threshold, the exemption from the 

periodic statement would have been 

limited to entities that exclusively 

service loans that they or an affiliate 

own or originated. The proposed 

exemption was limited to these 

servicers because of the incentives 

discussed above. The proposed 

commentary clarified the application of 

the small servicer definition. Proposed 

comment 41(e)(4)–1 stated that loans 

obtained by a servicer or an affiliate in 

connection with a merger or acquisition 

are considered loans for which the 

servicer or an affiliate is the creditor to 

whom the mortgage loan is initially 

payable. 

The proposed rule also stated that in 

determining whether a small servicer 

services 1,000 mortgage loans or less, a 

servicer would be evaluated based on its 

size as of January 1 for the remainder of 

the calendar year. A servicer that, 

together with its affiliates, crosses the 

threshold during a calendar year would 

have six months or until the beginning 

of the next calendar year, whichever is 

later, to begin providing periodic 

statements. Proposed comment 41(e)(4)– 

2 gave examples for calculating when a 

servicer that crosses the 1,000 loan 

threshold would need to begin sending 

periodic statements. The purpose of this 

provision was to permit a servicer that 

crossed the 1,000 loan threshold a 

period of time (the greater of either six 

months, or until the beginning of the 

next calendar year) to bring the 

servicer’s operations into compliance 

with the periodic statement 

requirements for which the servicer was 

previously exempt. 

Proposed comments 41(e)(4)–3 

clarified the circumstances in which 

subservicers or servicers who do not 

own the loans they are servicing, do not 

qualify for the small servicer exemption, 

even if such servicers are below the 

1,000 loan threshold. Proposed 

comment 41(e)(4)–4 clarified that, if a 

servicer subservices mortgage loans for 

a master servicer that does not meet the 

small servicer exemption, the 

subservicer cannot claim the benefit of 

the exemption, even if it services 1,000 

or fewer loans. The Bureau stated that 

permitting an exemption in such 

circumstances could potentially exempt 

a larger master servicer from the 

obligation to provide periodic 

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statements, even if it has master 

servicing responsibility for several 

thousand loans. 

Scope of the Small Servicer Exemption 

The Bureau received comments both 

supporting and disagreeing with the 

small servicer exemption. Commenters 

who supported the small servicer 

exemption agreed that, for the reasons 

expressed in the proposed rule, the large 

burden on small servicers and small 

decrease in consumer benefits justified 

the small servicer exemption to the 

periodic statement requirement. Many 

of these commenters felt the scope of 

the exemption should be expanded, and 

small servicers should be exempt from 

other provisions of the servicing rules. 

A few commenters disagreed with any 

small servicer exemption, because they 

felt all consumers should benefit from 

the protection of the rules, regardless of 

their servicer’s size. One commenter 

suggested that if small servicers are 

exempt, they should have strict liability 

for any errors. 

The Bureau considered the comments 

objecting to a small servicer exemption 

to the periodic statement, but believes 

that, for the reasons discussed above, 

such an exemption is appropriate in the 

periodic statement context. The Bureau 

also considered if a small servicer 

exemption would be appropriate for 

other provisions of the mortgage 

servicing rules. A discussion of small 

servicers is included in the discussion 

above of each section of the rule. In 

general, the Bureau has decided not to 

exempt small servicers from obligations 

to which they are already subject (such 

as the requirement to provide an ARM 

adjustment notice or payoff statement or 

to promptly credit payments). The 

Bureau also has decided not to exempt 

small servicers from providing the new, 

initial ARM adjustment notice, as that 

notice is required only once in the life 

of any ARM and should not require 

large incremental expense to deliver for 

servicers who already are providing the 

annual adjustment notices. Finally, the 

small servicer exemption overall is 

discussed in more detail in the DoddFrank Act section 1022 analysis and 

Final Regulatory Flexibility Analysis 

below. 

Size of the small servicer exemption. 

As discussed below in the Dodd-Frank 

Act section 1022 analysis, commenters 

almost unanimously stated that the size 

of the small servicer exemption was too 

small—most of the commenters 

suggested somewhere between 5,000 

and 10,000 loans would be more 

appropriate. Some commenters also 

proposed alternative definitions of a 

small servicer. Some commenters 

suggested that only the nation’s largest 

servicers should be required to provide 

the periodic statement. One commenter 

suggested that all portfolio loans should 

receive the benefit of the small servicer 

exemption. One commenter suggested 

this should be determined by the 

charged-off/delinquency ratio. One 

commenter suggested that entities 

exempt from the Home Mortgage 

Disclosure Act (HMDA) reporting 

requirements should be considered 

small servicers. Two commenters 

suggested that only institutions under 

direct Bureau supervision should be 

required to provide periodic statements. 

One commenter suggested that small 

servicer status should be determined 

solely by loan count, and the second 

prong of the test (requiring that the 

servicer owns or originated the loan) 

should be removed. Some commenters 

suggested that the small servicer 

definition should consider the type of 

entity–two suggested that State housing 

finance authorities should be exempt, 

and another commenter suggested all 

bona fide non-profits should be exempt. 

Several comments suggested that all 

credit unions should be exempt. 

The Bureau carefully considered the 

comments discussing the size of the 

small servicer exemption. The Bureau 

believes that, in general, loan count is 

the appropriate measure for a small 

servicer. The Bureau prefers loan count 

to asset threshold because the Bureau 

believes scale is better defined by the 

number of loans rather than the size of 

those loans. Further, these numbers will 

not need to be adjusted due to inflation. 

While the Bureau is hesitant to exempt 

entire classes of entities because of 

concerns about keeping a level playing 

field, the Bureau notes that certain 

classes of entities face special 

challenges when it comes to providing 

periodic statements, and have presented 

persuasive reasons why they should be 

exempt. In particular, the Bureau has 

decided to include Housing Finance 

Agencies in the small servicer 

exemption. 

In light of comments received and 

additional analysis of the data, the 

Bureau has expanded the loan threshold 

to 5,000 loans in the final rule. See the 

Dodd-Frank Act section 1022 analysis 

below for a full discussion of the loan 

threshold. 

The Bureau received several requests 

for clarification in counting the number 

of loans. One commenter asked if this 

meant 1,000 or fewer of the type of 

loans covered by this requirement, or 

1,000 or fewer of all types of mortgages 

serviced. Another commenter asked if 

HELOCs serviced should be included in 

the count. One commenter asked about 

interim servicing loans—loans only held 

for a very short period of time. The 

Bureau also received requests for 

clarifications about servicers who sell 

loans they originated as servicing 

released, and about creditors who 

qualify for the exemption and if they 

may continue to send their current 

periodic statements which do not meet 

all the requirements of the periodic 

statement provisions. 

The loan threshold is determined by 

counting loans that would be subject to 

the periodic statement requirement, 

thus any HELOCs would not be 

included in the count (because HELOCs 

are not subject to the periodic statement 

requirement). The Bureau notes that if a 

servicer sells a loan servicing released, 

it would no longer be a servicer for that 

loan, and thus that loan would have no 

effect on the determination of small 

servicer status. Finally, the Bureau notes 

that a small servicer not subject to the 

periodic statement requirements of 

§ 1026.41 would be free to continue 

sending periodic statements at its 

discretion, regardless of if those 

periodic statements conform to the 

periodic statement requirements. For 

these reasons, the Bureau is adopting 

the proposed exemption for periodic 

statements, but modifying the definition 

of small servicer in the manner 

discussed above. 

Housing Finance Agencies 

Certain commenters, including the 

National Council of State Housing 

Agencies, requested that the Bureau 

exempt loans financed by State housing 

finance agencies. These commenters 

observed that State housing finance 

agencies operate as public entities in 

every State and that, as 

instrumentalities of government, they 

have a unique mission to provide safe 

and affordable financing. In addition, 

the commenters stated, loans financed 

by such agencies tend to perform better 

than other loans. 

The Bureau agrees with the 

commenters that the risk of exempting 

loans from high-cost mortgage coverage 

where a State housing finance authority 

is the creditor should be low, given the 

agencies’ mission to provide safe and 

affordable financing to consumers and 

the protections provided by the 

agencies’ lending practices. The burdens 

placed on such agencies would take 

away from their mission and might 

render the agencies unable to originate 

the loans. In turn, consumers likely 

would turn to more expensive forms of 

credit, such as credit cards or unsecured 

debt. The Bureau notes that it 

recognized the special status of State 

housing finance agencies in the 2013 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10977 

139 In addition, a force-placed insurer stated that 

it would be require between 6–12 months to 

implement regulations relating to force-placed 

insurance requirements. 

HOEPA Final Rule which exempts such 

agencies from the provision in 

§ 1026.32(a)(5) prohibiting a creditor 

from being affiliated with a 

homeownership counseling entity. 

Upon further consideration, the 

Bureau is adopting in the final rule an 

exemption for mortgage transactions 

originated by a Housing Finance 

Agency, as that term is defined in 24 

CFR 266.5. The Bureau uses this 

definition to coordinate with the similar 

exemption in the 2013 HOEPA Final 

Rule. The Bureau is adopting this 

exemption pursuant to its authority 

under TILA section 105(a) to exempt all 

or any class of transactions where 

necessary or proper to effectuate the 

purposes of TILA, to prevent evasion, or 

to facilitate compliance. The Bureau 

believes that this exemption is 

necessary and proper to effectuate the 

purposes of TILA. 

Legal authority. The Bureau exercises 

its authority under TILA section 105(a) 

and (f), and Dodd-Frank Act section 

1405(b) to exempt small servicers from 

the periodic statement requirement 

under TILA section 128(f). For the 

reasons discussed above, the Bureau 

believes the exemption is necessary and 

proper under TILA section 105(a) to 

facilitate compliance. As discussed 

above, it would be very expensive for 

small servicers to incur the initial costs 

of setting up a system to send periodic 

statements, as a result, such servicers 

may choose to exit the market. In 

addition, consistent with TILA section 

105(f) and in light of the factors in that 

provision, the Bureau believes that 

requiring small servicers to comply with 

the periodic statement requirement 

specified in TILA section 128(f) would 

not provide a meaningful benefit to 

consumers in the form of useful 

information or protection. The Bureau 

believes that the business model of 

small servicers ensures their consumers 

already receive the necessary 

information, and that requiring them to 

provide periodic statements would 

impose significant costs and burden. 

Specifically, the Bureau believes that 

the exemption is proper without regard 

to the amount of the loan, the status of 

the consumer (including related 

financial arrangements, financial 

sophistication, and the importance to 

the consumer of the loan), or whether 

the loan is secured by the principal 

residence of the consumer. In addition, 

consistent with Dodd-Frank Act section 

1405(b), for the reasons discussed 

above, the Bureau believes that the 

modification of the requirements in 

TILA section 128(f) to exempt small 

servicers would further the consumer 

protection purposes of TILA. 

Appendix H to Part 1026 

The Bureau is exercising its authority 

under TILA section 105(c) to issue 

model and sample forms for § 1026.20(c) 

and (d). 

Appendix H–4(D) to Part 1026 

The Bureau is exercising its authority 

under TILA section 105(c) to issue 

model and sample forms for § 1026.20(c) 

and (d). 

Appendices G and H—Open-End and 

Closed-End Model Forms and Clauses 

Proposed revisions to appendices G 

and H–1 would have added the 

appendix sections that illustrate 

examples of the model forms and 

sample forms for the ARM disclosures 

proposed by § 1026.20(c) and (d) to the 

list of appendix sections illustrating 

examples of other model disclosures 

required by Regulation Z which format 

may not be changed by creditors. It also 

would have clarified that reference to 

creditors in the commentary would have 

been applicable to creditors, assignees, 

and servicers with regard to § 1026.20(c) 

and (d). The final rule is issued without 

this proposed revision and, thus, the 

comment is unchanged. Because both 

§ 1026.20(c) and (d) explicitly state that 

their requirements, as well as those of 

other regulations in subpart C that 

govern § 1026.20(c) and (d), apply to 

creditors, assignees, and servicers, 

including the reference in this 

commentary would be redundant and 

unnecessary. For a discussion of the 

decision to remove § 1026.20(c) and (d) 

from the list of model and sample forms 

that do not permit formatting changes, 

see the section-by-section analysis of 

§ 1026.20(c)(3)(i) and (d)(3)(i). 

Appendix H—Closed-End Model Forms 

and Clauses–7 

The Bureau is issuing appendix H–7 

with technical changes to conform to 

the final rule. 

Appendix H—Closed-End Model Forms 

and Clauses–7(i) 

Proposed revisions to appendix H–7(i) 

would have included § 1026.20(d), as 

well as § 1026.20(c), as the types of 

models illustrated in this appendix. The 

proposed revision also would have 

added text so that the provision stated 

that appendix H–4(D) included 

examples of the two types of model 

forms for adjustable-rate mortgages: 

§ 1026.20(d) initial adjustment notices 

and § 1026.20(c) payment change 

notices for adjustments resulting in 

corresponding payment changes. Having 

received no comments on this topic, the 

Bureau is adopting the commentary as 

proposed. 

VI. Effective Date 

This final rule is effective on January 

10, 2014. The Bureau believes that this 

approach is consistent with the 

timeframes established in section 

1400(c) of the Dodd-Frank Act and, on 

balance, will facilitate the 

implementation of the Title XIV 

Rulemakings’ overlapping provisions, 

while also affording covered persons 

sufficient time to implement the more 

complex or resource-intensive new 

requirements. Certain of the regulations 

set forth in the Final Servicing Rules are 

required under title XIV. Specifically, 

section 1420 of the Dodd-Frank Act, 

which requires the periodic statement, 

states that the Bureau ‘‘shall develop 

and prescribe a standard form for the 

disclosure required under this 

subsection, taking into account that the 

statements required may be transmitted 

in writing or electronically.’’ 15 U.S.C. 

1638(f)(2). Other regulations set forth in 

the Final Servicing Rules, while 

implementing amendments under title 

XIV of the Dodd-Frank Act, are not 

regulations required under title XIV. 

Pursuant to section 1400(c)(2) of the 

Dodd-Frank Act, the effective dates of 

these regulations need not be within one 

year of issuance. 

The Bureau received approximately 

60 comments from industry participants 

with respect to the appropriate effective 

date. As stated above, comments from 

consumer advocacy groups generally 

urged earlier effective dates. A number 

of industry trade associations, as well as 

a large bank and a small credit union 

indicated that the Bureau should 

provide a sufficient amount of time, but 

did not express an opinion regarding an 

appropriate timeframe. The majority of 

servicers, including large and small 

banks, non-bank servicers, and 

numerous credit unions, as well as their 

trade associations, indicated that the 

Bureau should establish an effective 

date of between 12 and 18 months after 

issuance.139 Some large banks, a bank 

servicer, numerous trade associations, 

the SBA, and the GSEs stated that the 

Bureau should consider an 

implementation period of 

approximately 18–24 months for certain 

of the requirements. Further, three 

banks and numerous trade associations 

for banks and manufactured housing 

servicers stated that the Bureau should 

consider an effective date between 24 

and 36 months after issuance. Each of 

the industry commenters generally 

stated that the requested time was 

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10978 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

140Specifically, section 1022(b)(2)(A) of the 

Dodd-Frank Act calls for the Bureau to consider the 

potential benefits and costs of a regulation to 

consumers and covered persons, including the 

potential reduction of access by consumers to 

consumer financial products or services; the impact 

on depository institutions and credit unions with 

$10 billion or less in total assets as described in 

section 1026 of the Dodd-Frank Act; and the impact 

on consumers in rural areas. 141See 77 FR 57318, 57321 (Sept. 17, 2012). 

142See Joseph E. Stiglitz. Economics of the Public 

Sector, at 85 ch.4 (3d ed., 2000). An alternative way 

to view the market failure is that servicers are both 

the agents of investors and, as a practical matter, 

monopoly providers of information to consumers 

about details of the loan and consumer payments. 

Market failures need not be mutually exclusive. 

necessary to effectively implement the 

regulations because of the complexity of 

the proposed rules, the impact on 

systems changes and staff training, and 

the cumulative impact of the proposed 

mortgage servicing rules when 

combined with other requirements 

imposed by the Dodd-Frank Act or 

proposed by the Bureau. These letters 

provide some basis to believe that 

implementing the regulations within 12 

months is challenging for many firms. 

They do not establish, however, that 

implementation in 12 months is 

impracticable. 

For the reasons already discussed 

above, the Bureau believes that an 

effective date of January 10, 2014 for 

this final rule and most provisions of 

the other title XIV final rules will ensure 

that consumers receive the protections 

in these rules as soon as reasonably 

practicable, taking into account the 

timeframes established by the DoddFrank Act, the need for a coordinated 

approach to facilitate implementation of 

the rules’ overlapping provisions, and 

the need to afford covered persons 

sufficient time to implement the more 

complex or resource-intensive new 

requirements. 

VII. Dodd-Frank Act Section 1022(b)(2) 

Analysis 

A. Overview 

In developing the final rule, the 

Bureau has considered potential 

benefits, costs, and impacts.140 The 

Proposal set forth a preliminary analysis 

of these effects, and the Bureau 

requested and received comments on 

the topic. In addition, the Bureau has 

consulted, or offered to consult with, 

the prudential regulators, HUD, the 

FHFA, the Federal Trade Commission, 

and the Federal Emergency Management 

Agency, with respect to consistency 

with any prudential, market, or systemic 

objectives administered by such 

agencies. The Bureau also held 

discussions with or solicited feedback 

from the U.S. Department of Agriculture 

Rural Housing Service, the Farm Credit 

Administration, the FHA, and the VA 

regarding the potential impacts of the 

final rule on those entities’ loan 

programs. 

In this rulemaking, the Bureau 

amends Regulation Z, which 

implements TILA, and the official 

interpretation to the regulation, as part 

of its implementation of the Dodd-Frank 

Act amendments to TILA’s mortgage 

servicing rules. The amendments to 

Regulation Z implement Dodd-Frank 

Act sections 1418 (initial interest rate 

adjustment notice for ARMs), 1420 

(periodic statements), and 1464 (prompt 

crediting of mortgage payments and 

response to requests for payoff 

amounts). The final rule also revises 

certain existing regulatory requirements 

for disclosing rate and payment changes 

to adjustable-rate mortgages in current 

§ 1026.20(c). 

Elsewhere in today’s Federal Register, 

the Bureau is also publishing the 2013 

RESPA Servicing Final Rule that 

implements Dodd-Frank Act section 

1463. The RESPA rule implements 

requirements regarding procedures for 

obtaining force-placed insurance; 

procedures for investigating and 

resolving alleged errors and responding 

to requests for information; reasonable 

information management policies and 

procedures; early intervention for 

delinquent borrowers; continuity of 

contact for delinquent borrowers; and 

loss-mitigation procedures. 

As an initial matter, in response to a 

comment, the Bureau considers whether 

the statute explicitly or implicitly 

addresses a market failure. Part II.A of 

the final rule (‘‘Overview of the 

Mortgage Servicing Market and Market 

Failures’’) discusses the servicing 

market and servicer incentives. As 

noted in the proposed rule, a 

fundamental feature of the market for 

servicing is that borrowers generally do 

not choose their own servicers.141 It is 

therefore difficult for borrowers to 

protect themselves from shoddy service 

or harmful practices. A borrower may 

select a servicer at origination by 

choosing a lender that pledges to service 

the loans that it originates. However, 

relatively few lenders commit to 

servicing the loans that they originate, 

most borrowers do not choose a servicer 

at origination, and some borrowers who 

do choose a servicer at origination may 

find that the servicer retains a 

subservicer that interacts with the 

borrower. A borrower may refinance a 

mortgage loan to receive a new servicer. 

However, refinancing is an expensive 

and generally impractical way for a 

homeowner to obtain a new servicer, 

and, similar to origination, the borrower 

does not generally select the new 

servicer. 

The Bureau recognizes that certain 

servicers have incentives to service 

well. Servicers that rely on a local 

reputation—their ability to attract new 

consumers depends on how well they 

treat current consumers—have 

incentives to provide high quality 

servicing. This describes many of the 

small servicers that the Bureau 

consulted as part of a process required 

under SBREFA. They described their 

businesses as requiring a ‘‘high touch’’ 

model of customer service, both to 

ensure loan performance and to 

maintain a strong reputation in their 

local communities. The vast majority of 

smaller servicers are community banks 

and credit unions, which tend to 

operate in narrowly defined geographic 

areas, depend deeply on the economies 

of these communities for their 

profitability, offer a range of products 

and services in both deposits and loans, 

are known for a ‘‘relationship’’ model 

that depends on repeat business to 

obtain more deposits and extend more 

loans, and could suffer significant harm 

to their business from any major failure 

to treat customers properly because they 

are particularly vulnerable to ‘‘word of 

mouth.’’ These small servicers also 

generally service only loans they either 

originated or hold on portfolio. 

The Bureau believes that servicers 

that service relatively few loans, all of 

which they either originated or hold on 

portfolio, generally have incentives to 

service well: foregoing the returns to 

scale of a large servicing portfolio 

indicates that the servicer chooses not to 

profit from volume, and owning or 

having originated all of the loans 

serviced indicates a stake in either the 

performance of the loan or in an 

ongoing relationship with the borrower. 

In general, however, mortgage 

servicing is influenced by the absence of 

avenues through which consumers can 

effectively reward or penalize servicers 

for the quality of servicing. A consumer 

cannot readily leave a servicer if the 

quality of servicing proves to be 

unsatisfactory, and the consumer cannot 

generally control the selection of the 

new servicer. Consumers also generally 

do not have other ways of imposing 

financial consequences on servicers for 

poor servicing. Markets are incomplete 

between consumers and servicers, and 

such incomplete markets are a form of 

market failure. This market failure 

leaves many servicers with only limited 

incentives to engage in certain activities 

of value to consumers.142

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143The Bureau noted in the proposals associated 

with the Title XIV Rulemakings that it sought to 

obtain additional data to supplement its 

consideration of the rulemakings, including 

additional data from the National Mortgage License 

System (NMLS) and the NMLS Mortgage Call 

Continued 

Of particular relevance to this 

rulemaking is the fact that servicers 

receive very little benefit from 

developing disclosures that are valuable 

to consumers. That is to say, the market 

provides servicers with limited 

incentives to conduct (or pay others to 

conduct) the research necessary to 

discover information that consumers 

find useful at different decision points 

and the ways to present this information 

to consumers. Servicers do have an 

incentive to provide borrowers with 

information and services that keep 

collection costs low. Thus, they have an 

incentive to make sure consumers know 

the payment due in each period, the 

date the payment is due, and where to 

send it. Servicers also have some 

incentive to limit customer inquiries, 

and so servicers may provide additional 

information that consumers want. The 

Bureau knows that certain servicers 

have experimented with improving their 

disclosures (and these instances are 

discussed below). However, this work 

does not appear to be widespread and 

the Bureau received only a small 

number of comments about efforts to 

improve disclosures. These facts are 

consistent with the fact that servicers 

receive minimal consequential feedback 

from consumers about the quality of 

servicing in general and the quality of 

servicing disclosures in particular. The 

market failure in mortgage servicing 

provides an economic rationale for 

establishing national servicing 

standards, including standards for 

disclosures, with a limited number of 

exceptions. 

Congress included in the Dodd-Frank 

Act the mortgage servicing provisions 

described above in response to 

pervasive and profound consumer 

protection problems in mortgage 

servicing. The new protections in the 

rules promulgated under TILA and 

RESPA will significantly improve the 

transparency of mortgage loans after 

origination, provide substantive 

protections to consumers, enhance 

consumers’ ability to obtain information 

from and dispute errors with servicers, 

and provide consumers, particularly 

distressed and delinquent consumers, 

with better customer service. 

B. Provisions To Be Analyzed 

The analysis below considers the 

benefits, costs, and impacts of the 

following major provisions: 

1. Changes in the format, content, and 

timing of the existing interest rate 

adjustment disclosures for most closedend adjustable-rate mortgages as 

required by revised § 1026.20(c). 

2. New initial interest rate adjustment 

disclosures for most closed-end 

adjustable-rate mortgages as required by 

new § 1026.20(d). 

3. Prompt crediting of payments for 

consumer credit transactions (both 

open- and closed-end) secured by the 

consumer’s principal dwelling and 

response to requests for payoff amounts 

from consumers with consumer credit 

transactions (both open- and closedend) secured by a dwelling as required 

by revised § 1026.36(c). 

4. New periodic statement disclosure 

requirements for most consumer credit 

transactions secured by a dwelling as 

required by new § 1026.41. 

With respect to each major provision, 

the analysis considers the benefits and 

costs to consumers and covered persons, 

and in certain instances considers other 

impacts. The analysis also addresses 

comments the Bureau received on the 

proposed Dodd-Frank Act section 1022 

analysis as well as certain other 

comments on the benefits or costs of 

provisions of the proposed rule when 

doing so is helpful to understanding the 

Dodd-Frank Act section 1022 analysis. 

Comments that mention the benefits or 

costs of a provision of the proposed rule 

in the context of commenting on the 

merits of that provision are addressed in 

the section-by-section analysis of that 

provision. The analysis also addresses 

certain alternative provisions that were 

considered by the Bureau in the 

development of the proposed rule, the 

final rule, or in response to comments. 

C. Data and Quantification of Benefits, 

Costs and Impacts 

Section 1022 of the Dodd-Frank Act 

requires that the Bureau, in adopting the 

rule, consider potential benefits and 

costs to consumers and covered persons 

resulting from the rule, including the 

potential reduction of access by 

consumers to consumer financial 

products or services resulting from the 

rule, as noted above; it also requires the 

Bureau to consider the impact of 

proposed rules on covered persons and 

the impact on consumers in rural areas. 

These potential benefits and costs, and 

these impacts, however, are not 

generally susceptible to particularized 

or definitive calculation in connection 

with this rule. The incidence and scope 

of such potential benefits and costs, and 

such impacts, will be influenced very 

substantially by economic cycles, 

market developments, and business and 

consumer choices that are substantially 

independent from adoption of the rule. 

No commenter has advanced data or 

methodology that it claims would 

enable precise calculation of these 

benefits, costs, or impacts. Moreover, 

the potential benefits of the rule on 

consumers and covered persons in 

creating market changes anticipated to 

address market failures are especially 

hard to quantify. 

In considering the relevant potential 

benefits, costs, and impacts, the Bureau 

has utilized the available data discussed 

in this preamble, where the Bureau has 

found it informative, and applied its 

knowledge and expertise concerning 

consumer financial markets, potential 

business and consumer choices, and 

economic analyses that it regards as 

most reliable and helpful, to consider 

the relevant potential benefits and costs, 

and relevant impacts. The data relied 

upon by the Bureau also include the 

public comment record established by 

the proposed rule. The Bureau 

recognizes that some parties may have 

different perspectives or consider 

potential benefits and costs differently. 

However, the Bureau notes that for 

some aspects of this analysis, there are 

limited data available with which to 

quantify the potential costs, benefits, 

and impacts of the final rule. Regarding 

costs to covered persons, the Bureau 

would need data on the one-time and 

ongoing costs of modifying existing 

disclosures and creating new 

disclosures. Further, as discussed 

below, these costs depend on the size of 

the servicer, whether it prepares 

disclosures in-house or uses a vendor, 

and (if it uses a vendor) the terms of the 

contract with the vendor. Some of this 

data is proprietary and not generally 

available. Quantifying consumer 

benefits would require data on the 

impact of the new disclosures on 

housing finance decisions like 

refinancing and the cost savings and 

other benefits of these decisions. 

In light of these data limitations, the 

analysis below generally provides a 

qualitative discussion of the benefits, 

costs, and impacts of the final rule. 

General economic principles, together 

with the limited data that are available, 

provide insight into these benefits, 

costs, and impacts. Where possible, the 

Bureau has made quantitative estimates 

based on these principles and the data 

that are available. For the reasons stated 

in this preamble, the Bureau considers 

that the rule as adopted faithfully 

implements the purposes and objectives 

of Congress in the statute. Based on each 

and all of these considerations, the 

Bureau has concluded that the rule is 

appropriate as an implementation of the 

Dodd-Frank Act.143

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10980 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

Report, loan file extracts from various lenders, and 

data from the pilot phases of the National Mortgage 

Database. Each of these data sources was not 

necessarily relevant to each of the rulemakings. The 

Bureau used the additional data from NMLS and 

NMLS Mortgage Call Report data to better 

corroborate its estimate of the contours of the nondepository segment of the mortgage market. The 

Bureau has received loan file extracts from three 

lenders, but at this point, the data from one lender 

is not usable and the data from the other two is not 

sufficiently standardized nor representative to 

inform consideration of the final rules. 

Additionally, the Bureau has thus far not yet 

received data from the National Mortgage Database 

pilot phases. The Bureau also requested that 

commenters submit relevant data. All probative 

data submitted by commenters were discussed in 

this document. 

144 In response to a comment, the Bureau notes 

that it is focused here on the fact that regulatory 

provisions that clarify ambiguous statutory 

provisions mitigate certain compliance costs 

associated with uncertainty over what the statutory 

provisions require. While it is possible that some 

clarifications would put greater burdens on 

servicers as compared to what the statute would 

ultimately be found to mandate, the Bureau believes 

that the rule’s clarifying provisions generally 

mitigate burden. 

145Reference in parts VII, VIII, and IX to 

‘‘servicers’’ with regard to the final rule for requests 

for payoff amounts means creditors, assignees, and 

servicers. 

146Reference in parts VII, VIII, and IX to 

‘‘servicers’’ with regard to the final rules for 

adjustable-rate mortgages means creditors, 

assignees, and servicers. 147See Pinto Paper, at 8. 

D. Baseline for Analysis 

The above-discussed amendments to 

TILA in the Dodd-Frank Act are selfeffectuating, and the Dodd-Frank Act 

generally does not require the Bureau to 

adopt regulations to implement these 

amendments. For example, certain 

provisions of the final rule regarding the 

new initial interest rate adjustment 

notice and the new periodic statement 

disclosure implement self-effectuating 

amendments to TILA. Thus, many costs 

and benefits of these provisions arise 

largely or entirely from those 

amendments, not from the final rule. 

These provisions of the final rule 

provide substantial benefits to servicers, 

compared to allowing the TILA 

amendments to take effect without 

implementing regulations, by clarifying 

parts of those amendments that are 

ambiguous. Greater clarity on these 

amendments, as provided by the final 

rule, should reduce the compliance 

burdens on covered persons by, for 

example, reducing costs for attorneys 

and compliance officers as well as 

potential costs of over-compliance and 

unnecessary litigation.144

Dodd-Frank Act section 1022 permits 

the Bureau to consider the benefits, 

costs, and impacts of the final rule 

solely compared to the state of the 

world in which the statute takes effect 

without implementing regulations. To 

provide the public better information 

about the benefits and costs of the 

statute, however, the Bureau has chosen 

to consider the benefits, costs, and 

impacts of the new initial interest rate 

adjustment notice and the periodic 

statement disclosure against a prestatutory baseline (i.e., to consider the 

benefits, costs, and impacts of the 

relevant provisions of the Dodd-Frank 

Act and the regulation combined). The 

Bureau has discretion in future 

rulemakings to choose the most 

appropriate baseline for that particular 

rulemaking. 

The provisions of the final rule 

regarding prompt crediting of payments 

and response to requests for payoff 

amounts also implement selfeffectuating amendments to TILA and 

the benefits, costs, and impacts of these 

provisions are also considered against a 

pre-statutory baseline. However, these 

amendments to TILA largely codify 

existing Regulation Z provisions in 

§ 1026.36(c). Thus, the pre-statute and 

post-statute baselines are substantially 

the same. The final rule largely clarifies 

servicer 145 duties that are ambiguous 

under the statute and existing 

regulations. 

Finally, the provisions regarding the 

§ 1026.20(c) disclosure for adjustablerate mortgages impose obligations on 

servicers 146 that are authorized, but not 

required, under TILA sections 105(a) 

and 128(f) and Dodd-Frank Act section 

1405(b). Accordingly, with respect to 

§ 1026.20(c), the Bureau considers the 

benefits, costs, and impacts of the 

provisions against the baseline provided 

by the current provisions of 

§ 1026.20(c). 

E. Coverage of the Final Rule 

Each provision covers certain 

consumer credit transactions secured by 

a dwelling, as described further in each 

section below. 

Size of the Small Servicer Exemption 

As discussed above, the Bureau 

believes that servicers that service 

relatively few loans, all of which they 

either originated or hold on portfolio, 

generally have incentives to service 

well: Foregoing the returns to scale of a 

large servicing portfolio indicates that 

the servicer chooses not to profit from 

volume, and owning or having 

originated all of the loans serviced 

indicates a stake in either the 

performance of the loan or in an 

ongoing relationship with the borrower. 

The vast majority of smaller servicers 

are community banks and credit unions, 

which tend to operate in narrowly 

defined geographic areas, depend 

deeply on the economies of these 

communities for their profitability, offer 

a range of products and services in both 

deposits and loans, are known for a 

‘‘relationship’’ model that depends on 

repeat business to obtain more deposits 

and extend more loans, and could suffer 

significant harm to the business from 

any major failure to treat customers 

properly because they are particularly 

vulnerable to ‘‘word of mouth.’’ These 

small servicers generally maintain 

‘‘high-touch,’’ customer-centric 

customer service models. They also 

generally service only loans they either 

originated or hold on portfolio. 

Where small servicers already have 

incentives to provide high levels of 

customer contact and information, the 

Bureau believes that the circumstances 

warrant exempting those servicers from 

complying with certain provisions. For 

community banks and credit unions in 

particular, affirmative communications 

with consumers help them (and their 

affiliates) to ensure loan performance, 

market other consumer financial 

products and services to the customers 

for whom they service mortgages and 

have a relationship, and protect their 

reputations in their local 

communities.147 Because these servicers 

generally have a long-term relationship 

with their customers, their incentives 

with regard to charging fees and other 

servicing practices tend to be more 

aligned with consumer interests. At the 

same time, consumers generally have 

easy access to these small communitybased servicers to obtain any 

information they desire. 

The Bureau believes that these two 

conditions are necessary to warrant a 

possible exemption from a provision of 

the rule—that is, that an exemption may 

be appropriate only for servicers that 

service a relatively small number of 

loans and either own or originated the 

loans they service. Larger servicers are 

likely to be much more reliant on, and 

sophisticated users of, computer 

technology in order to manage their 

operations efficiently. In such 

situations, compliance is likely to be 

somewhat easier to accomplish. Further, 

larger servicers also generally operate in 

a larger number of communities under 

circumstances in which the ‘‘high 

touch’’ model of customer service is not 

practical or service many loans in which 

they do not have as much a stake in the 

long-term performance. 

In order to implement the small 

servicer exemption, the Bureau defines 

a small servicer to be any servicer that, 

together with any affiliates, services 

5,000 or fewer mortgages loans, all of 

which the servicer or affiliates 

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148The 5,000-loan threshold reflects the purposes 

of the exemption that the rule establishes for these 

servicers and the structure of the mortgage servicing 

industry. The Bureau’s choice of 5,000 in loans 

serviced for purposes of Regulation Z does not 

imply that a threshold of that type or of that 

magnitude would be an appropriate way to 

distinguish small firms for other purposes or in 

other industries. 

149Credit Unions report the number and aggregate 

balance of mortgages held in portfolio on their Call 

Report. Using these reports the Bureau calculated 

the average unpaid principal balance of portfolio 

mortgages by State for credit unions with less than 

$1 billion in assets and applied the State specific 

figures to banks and thrifts under $10 billion in 

assets. For banks and thrifts with over $10 billion 

in assets, the Bureau relied on the OCC Mortgage 

Metrics Report, which showed an average unpaid 

principal balance estimate of $175,000. For 

securitized loans, the Bureau relied on the FHFA’s 

Home Loan Performance database, which provides 

data by size of securitized loan book; this yielded 

average unpaid principal balances ranging from 

$141,000 to $189,000. 

150The Bureau notes, however, that the FDIC 

recently released a new set of empirical criteria for 

identifying community banks in which some banks 

with under $1 billion in assets are excluded and 

some banks with over $1 billion in assets are 

included. See Fed. Deposit Ins. Corp., FDIC 

Community Banking Study, at 1–5 (Dec. 2012), 

available at http://www.fdic.gov/regulations/ 

resources/cbi/study.html. The study is somewhat 

critical of using a $1 billion threshold to define 

community banks, as has been traditional. The 

Bureau’s rule equates roughly to a $2 billion 

threshold to the extent that the rule covers 98% of 

insured depositories and credit unions with fewer 

assets. 

151To obtain estimates of loan counts, the Bureau 

aggregated mortgage loan counts obtained or 

derived from the FHFA ‘‘Home Loan Performance’’ 

data described above, the Board’s Flow of Funds 

Accounts of the United States (statistical release 

z.1), the data from the credit union Call Report and 

the bank and thrift Call Report, the CoreLogic 

mortgage loan servicing data set, and the BBx data 

set from BlackBox Logic. 

152The Bureau believes that almost all insured 

depositories and credit unions that service 5,000 or 

fewer loans own or originated those loans. Entities 

servicing loans they did not originate and do not 

own most likely view servicing as a stand-alone line 

of business, and they would choose to service 

substantially more than 5,000 loans in order to 

obtain a profitable return on their investment in 

servicing. To the extent the assumption does not 

hold, it is more likely not to hold for insured 

depositories and credit unions servicing more than 

5,000 loans. 

153The Bureau received comments from two 

credit unions recommending a 5,000 mortgage loan 

threshold. Two bank trade associations 

recommended a 10,000 loan threshold, one bank 

recommended 15,000, and the Small Business 

Administration recommended 5,000 to 10,000. One 

bank trade association recommended that a small 

servicer should be either any servicer that services 

only loans that it owns or originated, without limit, 

or any servicer that services 10,000 loans or fewer. 

For the reasons described above, the Bureau 

believes that the 5,000 loan count threshold 

coupled with the requirement that the servicer 

owns or originated the loans provide an appropriate 

definition of small servicer for purposes of the 

exemption. 

originated or own.148 The definition 

incorporates the requirement that the 

servicer or affiliates originated or own 

the loans because, as explained above, 

the Bureau believes that this is a key 

indicator of servicers that generally have 

incentives to provide high levels of 

customer contact and information. To 

develop the loan count threshold, the 

Bureau computed loan counts for 

insured depository institutions using 

data on aggregate unpaid principal 

balance and a measure the Bureau 

derived for the average loan unpaid 

principal balance at insured 

depositories.149 The Bureau’s 

methodology takes into account the fact 

that servicers that service smaller 

numbers of loans also tend to service 

loans with smaller unpaid principal 

balances. For example, the Bureau finds 

that the average unpaid principal 

balance on mortgage loans at insured 

depositories and credit unions is about 

$160,000, but it is only about $80,000 at 

insured depositories and credit unions 

with under $1 billion in assets. 

The Bureau believes that the 5,000 

mortgage loan threshold further 

identifies the group of servicers that 

make loans only or largely in their local 

communities or more generally have 

incentives to provide high levels of 

customer contact and information. The 

Bureau also believes, in light of the 

available data, that no other threshold is 

superior in balancing potential overinclusion and under-inclusion. With the 

threshold set at 5,000 loans, the Bureau 

estimates that over 98% of insured 

depositories and credit unions with 

under $2 billion in assets fall beneath 

the threshold. In contrast, only 29% of 

such institutions with over $2 billion in 

assets fall beneath the threshold and 

only 11% of such institutions with over 

$10 billion in assets do so. Further, over 

99.5% of insured depositories and 

credit unions that meet the traditional 

threshold for a community bank—$1 

billion in assets—fall beneath the 

threshold.150 The Bureau estimates 

there are about 60 million closed-end 

mortgage loans overall, with about 5.7 

million serviced by insured depositories 

and credit unions that qualify for the 

exemption.151

The Bureau believes that the insured 

depositories and credit unions that fall 

below the 5,000 loan threshold consist 

overwhelmingly of entities that make 

loans in their local communities and 

have incentives to provide high levels of 

customer contact and information. 

Further, while some such entities may 

service more than 5,000 loans, the 

Bureau believes that relatively few do, 

so expanding the loan count above 

5,000 is more likely to include entities 

that use a different servicing model. If 

the loan count threshold were set at 

10,000 mortgage loans, for example, 

over 99.5% of insured depositories and 

credit unions with under $2 billion in 

assets would fall beneath the threshold. 

However, 50% of insured depositories 

with over $2 billion in assets and 20% 

of those with over $10 billion in assets 

would fall beneath the threshold. The 

Bureau recognizes that some of these 

servicers may not qualify as small 

servicers because some may not own or 

have originated all of the loans they 

service. However, the Bureau believes 

that these figures give a fair 

representation of the types of servicers 

that would qualify as small servicers 

given the respective thresholds.152

The Bureau concludes that the 5,000 

mortgage loan threshold, coupled with 

the requirement to service only loans 

owned or originated, provides a 

reasonable balance between the goal of 

including a substantial number of 

servicers that make loans only or largely 

in their local communities or more 

generally have incentives to provide 

high levels of customer contact and 

information and excluding servicers that 

use a different, less personal business 

model. The Bureau further believes that 

it is appropriate for a definition of small 

servicers, for purposes of an exemption 

to servicing rules, to include conditions 

specifically associated with the 

incentives and business model of 

servicers, such as owning or originating 

all loans. There is no perfect way, 

however, to identify servicers that have 

chosen a business model in which an 

essential component is providing high 

levels of customer contact and 

information.153

Finally, the Bureau estimates that 

there are about 13.9 million closed-end 

mortgage loans serviced by nondepositories. The data is not available 

with which to accurately estimate the 

number of exempt non-depository 

servicers or the number of loans they 

service. However, the Bureau believes 

that the number of loans serviced is a 

small percentage of this total given the 

financial advantages of servicing large 

numbers of loans. The Bureau has 

therefore decided not to distinguish, in 

the definition of a small servicer, 

whether a mortgage servicer is an 

insured depository or credit union or 

has some other business form. 

Size of the Small Servicer Exemption in 

the Proposed Rule 

The Bureau proposed 1,000 mortgage 

loans for the threshold in the definition 

of a small servicer. At the time of the 

proposal, the Bureau understood that a 

significant number of servicers that 

maintained ‘‘high touch’’ customer 

service models would have qualified for 

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154This is the average unpaid principal balance 

for first-lien residential mortgages at the largest 

national banks, which at the time of the report 

accounted for 63 percent of all outstanding 

mortgages; See Office of the Comptroller of the 

Currency, OCC Mortgage Metrics Report, Second 

Quarter 2011 (Sept. 2011) (‘‘OCC Mortgage Metrics 

Report’’), available at http://www.occ.treas.gov/ 

publications/publications-by-type/otherpublications-reports/mortgage-metrics-2011/ 

mortgage-metrics-q2-2011.pdf. 

155As discussed in part V, the Bureau believes 

that the annual notice is duplicative given that the 

periodic statement required by § 1026.41 provides 

much of the same information. Thus, eliminating 

the annual notice reduces costs for servicers with 

little or no loss in benefits to consumers. 

156A comment on timing is discussed below 

under costs to consumers. 

the proposed exemption. This 

understanding was based in part on 

estimates of the number of loans 

serviced by banks, thrifts and credit 

unions derived from data on the 

aggregate unpaid principal balance in 

Call Reports and an assumed average 

unpaid principal balance on mortgage 

loans of $175,000.154

A number of industry commenters 

provided information about the unpaid 

principal balance on mortgage loans at 

their institutions and indicated that the 

average unpaid principal balance was 

much smaller. One commenter stated 

that the principal balance on its loans at 

origination was less than half the 

Bureau’s figure; for 2011 originations 

the principal balance was $81,600. 

Another commenter stated that its 

average loan amount was about $56,000 

and that the average mortgage in the 

State of Oklahoma mid-2012 was about 

$106,000. Yet another commenter stated 

that the median size of the loans on its 

portfolio was about $70,000. One 

commenter stated that the Bureau’s 

approach penalized servicers that 

specialize in moderately priced homes. 

The Bureau seriously considered these 

comments. In response, the Bureau 

developed the methodology described 

above to estimate the number of loans 

serviced by insured depositories and 

credit unions. 

F. Potential Benefits and Costs to 

Consumers and Covered Persons 

1. Changes in the Format, Content, and 

Timing of the Regulation Z § 1026.20(c) 

Disclosure for Adjustable-Rate 

Mortgages 

Under current § 1026.20(c), a notice of 

interest rate adjustment for variable-rate 

transactions subject to § 1026.19(b) must 

be mailed or delivered to consumers 

whose payments will change as a result 

of an interest rate adjustment at least 25, 

but no more than 120, calendar days 

before a payment at a new level is due. 

Creditors must also provide an annual 

disclosure to consumers whose interest 

rate, but not mortgage payment, changes 

during the year covered by the 

disclosure. The final rule eliminates the 

annual disclosure. Thus, the discussion 

below relates exclusively to the 

payment change disclosure required 

under § 1026.20(c).155 The final rule 

also changes the minimum time for 

providing advance notice to consumers 

from 25 days to 60 days before the first 

payment at a new level is due, with an 

accommodation for ARMs with lookback periods of less than 45 days 

originated before January 10, 2015. The 

maximum time for advance notice 

remains the same: 120 days prior to the 

due date of the first payment at a new 

level. The revised § 1026.20(c) 

disclosure also contains additional 

content, as described in part V. The 

format and content of the revised 

§ 1026.20(c) disclosure closely tracks 

the format and content of the initial 

interest rate adjustment disclosure 

under § 1026.20(d), discussed below. 

Potential benefits to consumers. 

Regarding the change in timing, the 

Bureau does not believe that the current 

minimum of 25 days provides sufficient 

time for consumers to pursue 

meaningful alternatives such as 

refinancing, home sale, loan 

modification, forbearance, or deed-inlieu of foreclosure. Nor does this 

minimum provide sufficient time for 

consumers to adjust household finances 

to cover new payments. The Board’s 

2009 Closed-End Proposal stated that 

HMDA data for the years 2004 through 

2007 suggested that a requirement to 

provide ARM adjustment disclosures 

60, rather than 25, days before the first 

payment at a new level is due would 

more closely reflects the time needed for 

consumers to refinance a loan.156

The benefits to consumers from the 

content of the revised § 1026.20(c) 

disclosure are measured against a 

baseline provided by the current 

§ 1026.20(c) disclosure. Thus, the 

benefits of the rule flow entirely from 

changes to the disclosure; for the sake 

of clarity, however, the discussion 

mentions certain key features of the 

disclosure that are unchanged. For 

qualitative analysis, the revisions to the 

§ 1026.20(c) disclosure may be broadly 

categorized as facilitating (a) the choice 

of an alternative to making the new 

payment, including refinancing; (b) the 

budgeting of household resources; and 

(c) the accumulation of equity by certain 

consumers (i.e., those with interest-only 

or negatively-amortizing payments). 

Individual items in the disclosure may 

provide more than one of these benefits. 

The benefits of these disclosures are 

discussed further in part V. 

The current and revised § 1026.20(c) 

disclosures both provide the current and 

upcoming interest rate and payment 

(not an estimate) and the date the first 

payment at the new rate is due. This 

may alert the consumer to a problem 

with affordability and the need to assess 

alternatives. However, only the revised 

disclosure provides notice of a 

prepayment penalty and explains the 

circumstances under which any 

prepayment penalty may be imposed. 

This notice may be useful to some 

consumers facing a problem with 

affordability and needing to assess 

alternatives. For example, the notice 

may prompt a consumer who is unclear 

about whether a penalty is still in effect 

to contact her servicer; a consumer must 

know if a penalty exists and (if so) the 

amount to properly assess alternatives 

that require paying off the existing loan. 

In addition, the disclosure of the 

persistent features of the loan facilitates 

consumer evaluation of the longer-term 

benefits of the loan compared to 

alternatives. For instance, the revised 

disclosure includes an explanation of 

how the new interest rate and payment 

are determined, including the index or 

formula used and any adjustment to the 

index such as any margin added. The 

revised disclosure also states any limits 

on the interest rate or payment increase 

at each adjustment and over the life of 

the loan and the earliest date at which 

any foregone interest increase could be 

applied. In contrast, the current 

§ 1026.20(c) disclosure provides only 

the index value without any explanation 

and does not provide information about 

limits on interest rate or payment 

increases. The additional information 

facilitates comparisons with alternative 

loans and any reevaluation of the 

consumer’s housing finance decisions 

and comparisons with alternative 

financing options. All of this 

information is also useful to consumers 

for the budgeting of household 

resources. 

The revised § 1026.20(c) disclosure 

provides additional information to 

consumers with interest-only or 

negatively-amortizing loans that 

addresses the accumulation of equity. 

For these loans, the revised disclosure 

states the amount of the current and 

new payment allocated to pay principal, 

interest, and taxes and insurance in 

escrow, as applicable, and information 

on how these payments will affect the 

balance of the loan. If negative 

amortization will occur due to the 

interest rate adjustment, the disclosure 

states the payment required to fully 

amortize the loan at the new interest 

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157The Bureau received comments from industry 

that also made this point. 158Of course, a consumer who receives the 

prescribed § 1026.20(c) disclosure may derive little 

additional benefit from shortly thereafter receiving 

some of the same information on the periodic 

statement disclosure. There would, however, likely 

be little cost saving for servicers in not having to 

provide the information on the periodic statement 

disclosure that also appears on the § 1026.20(c) 

disclosure for just one or two months. 

159For a general discussion of disclosure 

formatting, disclosure testing and consumer 

benefits, see Jeanne Hogarth & Ellen Merry, 

Designing Disclosures to Inform Consumer 

Financial Decisionmaking: Lessons Learned From 

Consumer Testing, Fed. Reserve Bull., Aug. 2011, at 

1 (‘‘Hogarth & Merry’’). 

160One commenter suggested that the Bureau 

conduct a ‘‘breakeven’’ analysis, referring to OMB’s 

Circular A–4 guidance that it issued in connection 

with Executive Order 12866. Section 1022(b)(2)(A) 

requires the Bureau to consider the potential 

benefits and costs to consumers and covered 

persons. By its terms, section 1022(b)(2)(A) does not 

require the Bureau to quantify the benefits and costs 

of the rule; limit its consideration to quantifiable 

benefits and costs; or determine whether the 

benefits outweigh the costs. Rather, the Bureau is 

required to ‘‘consider’’ the benefits and costs of the 

rule. The Bureau believes that there are multiple 

reasonable approaches for conducting the 

consideration called for by Dodd-Frank Act section 

1022(b)(2)(A) and that the approach it has taken in 

this analysis is reasonable and that, particularly in 

light of the difficulties of reliably estimating certain 

benefits and costs and the Bureau’s resource 

constraints, it has discretion to decline to undertake 

additional or different forms of analysis. 

161Although the reduction in monthly payment 

would last for more than one month, the benefit 

attributable to the change in timing of the 

disclosure would be the one month of savings. 

rate. The disclosure alerts consumers 

with these types of loans to features that 

bear on equity accumulation, and it 

provides this information at a time 

when these consumers may be 

evaluating their mortgage terms and 

considering refinancing. In contrast, the 

current § 1026.20(c) disclosures provide 

only the loan balance and information 

about the payment required to fully 

amortize the loan at the new interest 

rate if the interest rate adjustment 

caused the negative amortization. 

As discussed in part V, the Bureau 

recognizes that the benefit to consumers 

of information in a particular disclosure 

may be attenuated to the extent that the 

same information is available in other 

disclosures that are provided at the 

same (or nearly the same) time.157 In 

particular, the periodic statement will 

provide consumers with some of the 

same information as that in the revised 

§ 1026.20(c) disclosure. However, the 

differences in the timing of the two 

disclosures makes the periodic 

statement less useful than the revised 

§ 1026.20(c) disclosure for facilitating 

comparisons between the current and 

new payment before the new payment is 

due. Similarly, while the periodic 

statement presents the new payment 

due and the amount paid the previous 

month, it does not compare the two as 

explicitly as the revised § 1026.20(c) 

disclosure does. Finally, since the 

revised § 1026.20(c) disclosure is 

provided only if the payment changes, 

the benefit to consumers from receiving 

important information on both 

disclosures is likely greater than the 

benefit of receiving this information 

only on the periodic statement 

disclosure.158

The Bureau is also prescribing 

formatting requirements for the 

§ 1026.20(c) disclosure. As discussed 

above, these requirements benefit 

consumers by facilitating consumer 

understanding of the information in the 

disclosures. The final rule provides that 

the disclosures must be provided in the 

form of a table and in the same order as, 

and with headings and format 

substantially similar to, certain model 

forms provided with the final rule. The 

Bureau’s testing of certain information 

in the § 1026.20(d) notice (that is the 

same as certain information in the 

§ 1026.20(c) notice) showed that the 

participants readily understood the 

information in the notice when the 

terms and calculations were presented 

in the logical order contained in the 

model forms. While there is no formula 

for producing the ideal disclosure, the 

Bureau believes that disclosures that 

satisfy the prescribed formatting 

requirements likely provide greater 

benefits to consumers than disclosures 

that do not satisfy these requirements. 

The Bureau also believes that there is 

some consumer benefit in harmonizing 

the § 1026.20(c) and (d) notices, so they 

present similar information in a similar 

format.159

Although the Bureau does not have 

the data necessary to quantify the 

consumer benefits of the revisions to the 

§ 1026.20(c) disclosure required by the 

rule, the following hypothetical 

illustrates how consumers are likely to 

benefit from the disclosures.160 The 

Bureau estimates that approximately 

650,000 adjustable-rate mortgages may 

have an interest rate adjustment in each 

of the next three years. Suppose that just 

5 percent of the consumers with these 

mortgages are sent the disclosure (this 

occurs only if the payment adjusts) and, 

because of the change in the timing from 

25 days to 60 days before the first 

payment at a new level is due, refinance 

one month sooner. If these consumers 

reduce their monthly payment by $50, 

then the annual savings to consumers 

would be over $1.6 million or about 

$2.50 per disclosure.161

The Bureau received comments that 

questioned the benefits to consumers of 

the proposed changes to the § 1026.20(c) 

notice both broadly and in respect to 

particular changes. The Bureau 

disagrees with these assessments of the 

value of the modifications to the 

§ 1026.20(c) notice. The belief that the 

current notice is adequate may be based 

on the fact (explained above) that 

consumers cannot provide the standard 

market signal that a servicer is 

inadequate, i.e., finding another service 

provider. Since servicers receive 

minimal consequential feedback from 

consumers about the quality of servicing 

disclosures, they have little incentive to 

incur the costs of researching and 

discovering the information consumers 

want in the payment adjustment notice 

and the ways to present this information 

that consumers find most useful. The 

Bureau disagrees with the assertion that 

the Bureau failed to cite any research 

supporting the proposed revisions of the 

§ 1026.20(c) notice. On the contrary, the 

proposal noted that the Bureau worked 

closely with ICF Macro (Macro) to 

develop the closely related § 1026.20(d) 

model disclosure, conducted three 

rounds of consumer testing, and revised 

the disclosure on the basis of the test 

results. Based on this anecdotal 

evidence and the Bureau’s own 

judgment and expertise about the 

marketplace and consumer needs and 

behavior, the Bureau believes that the 

benefits to the vast majority of 

consumers from national servicing 

standards for disclosures provided by 

the rule are substantial. 

The Bureau did receive five 

comments from industry referring to 

efforts by servicers to improve consumer 

disclosures. One commenter discussed 

its general commitment to provide 

customers with clear, simple 

information about their loans. Another 

discussed a successful effort to improve 

its interest rate adjustment disclosure in 

an effort to increase consumer 

awareness, improve loss mitigation, and 

facilitate early interventions where 

delinquency could be caused by a 

payment increase. This commenter said 

it provided simple, low-tech forms but 

with a longer notice period and 

achieved significant results and 

response rates. One commenter from a 

credit union described an effort to 

provide earlier rate adjustment 

disclosures to members so they would 

have more time to make decisions about 

obtaining a new loan or continuing with 

their current one. The initial attempt at 

this enhancement was difficult and the 

commenter had to add a staff member to 

manage the project, but after some 

adjustments to the timing of the 

disclosures the enhancement seems to 

have been successful. A fourth industry 

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10984 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

162 In this and subsequent numerical discussions, 

‘‘amortizing’’ an amount $x over a certain number 

of years means making equal payments in each year 

that sum up to $x. The Bureau is using five years 

because Section 1022(d) of the Dodd-Frank Act 

provides that the Bureau shall assess significant 

rules adopted by the Bureau within five years of the 

effective date of the rule. 

163Any ARM with a 45 day (or longer) look-back 

period could comply with the requirement to 

provide earlier notice. In 2011, approximately 10% 

of new home-purchase loans were ARMs and most 

had loan contracts with 45-day look-back periods. 

Approximately 88% of the ARMs guaranteed by 

Fannie Mae and Freddie Mac have 45-day look-back 

periods. 

commenter requested permission to 

continue to use its ‘‘consumer-tested 

and appreciated’’ periodic billing 

statement. A fifth industry commenter 

argued against including delinquency 

information in the periodic statement 

since, in the commenter’s experience, 

this information was more effective in 

collection letters. 

The Bureau recognizes that certain 

servicers have experimented with 

improving their disclosures. However, 

this work does not appear to be 

widespread; as noted, the Bureau 

received only a small number of 

comments about efforts to improve 

disclosures. The Bureau recognizes that 

servicers have an incentive to keep 

collection costs low and therefor to 

make sure consumers know the 

payment due in each period, the date 

the payment is due, and where to send 

it. Servicers also have some incentive to 

limit customer inquiries, and they may 

therefore provide some additional 

information that consumers want. Some 

consumers receive disclosures, 

however, given the market failure 

described above, the Bureau does not 

believe that the aforementioned 

incentives are sufficient to generate 

better disclosures that would benefit 

consumers. 

Potential costs to consumers. As 

explained further in the discussion of 

costs to covered persons, the cost to 

covered persons is expected to be about 

83 cents per disclosure. This estimate 

takes into account both one-time 

additional costs (amortized over five 

years) and additional annual production 

and distribution costs.162

Given the small additional cost per 

disclosure, the Bureau believes that this 

cost will not be passed on to consumers 

in the form of increased fees or charges. 

Servicers may in general attempt to shift 

a cost increase onto others, such as 

creditors, who may in turn attempt to 

pass on such costs to consumers, so 

consumers may ultimately bear part of 

a cost increase that falls nominally on 

servicers. For the prescribed 

§ 1026.20(c) disclosure, however, the 

costs to be shifted are very small. Thus, 

the disclosure is not likely to cause any 

material cost increase on consumers. 

An industry association commented 

that the change in the timing of the 

ARM disclosure would increase the 

pricing of ARMs. As one industry 

commenter explained, committing 

earlier to an interest rate to provide 

consumers with earlier notice of the 

new rate and payment would increase 

interest rate risk. While the Bureau 

agrees with this point in general, the 

Bureau disagrees with the relevance of 

the point in this instance. First, as 

discussed in part V, the Bureau believes 

that the majority of ARMs already 

commit to an interest rate early enough 

to provide consumers with the earlier 

notice.163 Thus, the requirement for 

earlier notice would not, in fact, require 

an earlier commitment to the interest 

rate for the majority of ARMs. Second, 

as also discussed in part V, the Bureau 

believes it is unlikely that, for the 

minority of ARM products with a lookback period of less than 45 days, the 

adjustment to a slightly longer look-back 

period will meaningfully impact the 

manner in which the product is priced. 

The slight increase in the period is not 

a sufficiently long enough time for a 

material change in interest rates except 

in the most unusual circumstances. 

As noted above, the final rule adds 

commentary to explain that servicers 

have the flexibility to modify the 

disclosures to accommodate certain 

situations and consumer credit 

transactions not addressed by the model 

forms. Still, servicers must present the 

required information in a format 

substantially similar to the format of the 

prescribed model forms. The Bureau 

recognizes the possibility that 

constraints on the way servicers present 

information to consumers may prohibit 

the use of more effective forms that 

servicers are using or may develop. The 

constraints would then impose a cost on 

consumers. 

The Bureau does not believe these 

costs are substantial. As discussed 

above, very few commenters described 

efforts to test and develop superior 

disclosures. Nor does the Bureau believe 

that servicers’ current disclosures 

generally are superior to the prescribed 

disclosure, and the Bureau is unaware 

of general efforts by servicers to develop 

interest rate adjustment notices that 

provide the benefits to consumers of the 

prescribed model forms. The Bureau 

worked closely with Macro to develop 

the closely related § 1026.20(d) model 

disclosure, conducted three rounds of 

consumer testing, and revised the 

disclosure on the basis of the test 

results. Based on this anecdotal 

information, the comment letters, and 

the Bureau’s own expertise in disclosure 

and consumer behavior, the Bureau 

believes that the risk of precluding 

servicers from using disclosures that 

might provide greater benefits to their 

customers is relatively small. 

As discussed above, some consumers 

have adjustable-rate mortgages with 

look-back periods shorter than 45 days. 

For example, FHA and VA ARMs often 

have look-back periods of 15 or 30 days. 

Servicers that handle such ARMs 

contractually will not be able to comply 

with the requirement to provide the 

§ 1026.20(c) disclosure between 60 and 

120 days before the first payment at a 

new level is due. Accordingly, the 

Bureau is grandfathering these existing 

ARMs, if originated before January 10, 

2015. Going forward, however, ARMs 

must be structured to permit 

compliance with the prescribed 60- to 

120-day timeframe. 

It is possible that ARMs with lookback periods shorter than 45 days may 

have certain cost advantages to servicers 

or investors in certain interest rate 

environments (e.g., when rates are rising 

quickly). In such environments, 

competition among servicers for 

servicing rights may translate the cost 

advantage into a benefit to originators 

and consumers; and, in that event, the 

required 60- to 120-day timeframe may 

impose a cost on consumers by making 

mortgages with such shorter look-back 

periods unavailable. The Bureau 

believes that because very few 

consumers have such ARMs, very few 

consumers would experience such 

costs. 

Potential benefits to covered persons. 

The Bureau has carefully considered 

whether there are any significant 

benefits to covered persons from this 

provision. The Bureau has determined 

that there are not. 

Potential costs to covered persons. 

The modifications to the § 1026.20(c) 

disclosure will result in certain 

compliance costs to covered persons. 

Based on discussions with servicers and 

software vendors, the Bureau believes 

that, in general, servicers of all sizes 

will incur minimal one-time costs to 

learn about the final rule. They will 

generally use vendors for one-time 

software and IT upgrades and for 

producing the disclosure. The revised 

disclosure provides to consumers 

information that is not currently 

disclosed to them, including 

information that is specific to each loan. 

Servicers (or their vendors) may not 

have ready access to all of this 

additional loan-level information; for 

example, if some of this additional 

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164 In discussions such as this of costs to covered 

persons, ‘‘small servicers’’ are servicers that meet 

the size standard for that business established by 

the Small Business Administration. Banks, thrifts, 

and credit unions that service mortgage loans must 

have $175 million or less in assets and other 

servicers must have $7 million or less in average 

annual receipts. 

165This analysis considers the benefits, costs, and 

impacts of disclosures assuming that all servicers 

use vendors for this purpose. The Bureau believes 

that virtually all servicers, regardless of size, use 

vendors for disclosures. 

166For these estimates, the Bureau used the Home 

Loan Performance data from the FHFA. Home Loan 

Performance is a supervisory loan-level database of 

all guaranteed Fannie Mae and Freddie Mac 

mortgages. It includes characteristics of the loans at 

origination and then a quarterly time-series of 

performance throughout the life of the loan. 

167Furthermore, by eliminating the annual 

§ 1026.20(c) disclosure, the rule reduces certain 

production and distribution costs relative to the 

baseline. 

168The Bureau makes the following assumptions, 

based on discussions with industry. All 12,600 

servicers familiarize themselves with the rule for a 

total one-time cost of $750,000. Approximately 

8,000 small servicers (i.e., servicers that meet the 

Small Business Administration size standard) use 

100 vendors, each of which spends 80 hours to 

revise the existing disclosure and another 80 hours 

validating it, all at $72 per hour. This gives an 

additional one-time cost of $1 million. Thirty-one 

very large servicers perform these tasks in-house, 

for an additional one-time cost of $250,000. This 

gives total one-time costs of $2 million. The 

remaining servicers have contracts with vendors 

under which the vendor absorbs all one-time costs 

of a disclosure mandated by regulation. 

169 $528,000 = ($2,000,000/5) + $128,000. 

170U.S. Consumer Fin. Prot. Bureau, Doc ID No. 

0151, Public Comment Submission on CFPB–2012– 

0033, at 9 (Oct. 9, 2012) (comment from Robert 

Davis, Exec. VP, American Bankers Association). 

information is stored in a database that 

is not regularly accessed by systems that 

produce the current disclosures. 

The Bureau believes that under 

existing vendor contracts, large- and 

medium-sized servicers may not be 

charged for the upgrades but will be 

charged for producing and then 

distributing (i.e., mailing or 

electronically providing) the disclosure. 

Vendors will likely pass along all of 

these costs to small servicers.164

However, when most servicers 

simultaneously need an upgrade, the 

one-time cost is mitigated by the fact 

that the costs of a single vendor may be 

spread among a large number of 

servicers.165

Extrapolating from FHFA data, the 

Bureau estimates that approximately 

639,000 adjustable-rate mortgages will 

have an interest rate adjustment in each 

of the next three years.166 Consumers 

with these mortgages will receive the 

revised § 1026.20(c) disclosure, 

however, only if the interest rate and 

payment adjusts; thus, this figure is 

most likely an overestimate of the 

number of consumers that would 

receive the revised § 1026.20(c). The 

Bureau believes there are essentially no 

distribution costs attributable to the 

rule. In the absence of the rule, servicers 

would nonetheless be required to 

provide the current § 1026.20(c) 

payment change disclosure, and the 

current and revised payment change 

disclosures have essentially the same 

number of recipients.167 The remaining 

annual costs attributable to the rule are 

production costs associated with the 

additional content and formatting. 

Based on discussions with industry, the 

Bureau believes the annual production 

costs passed along to servicers would be 

about $128,000 (20 cents production 

cost per disclosure). Finally, based on 

discussions with industry and 

extrapolating from FHFA data, the 

Bureau estimates the one-time cost of 

modifying the existing § 1026.20(c) 

disclosure for all 12,600 servicers to be 

about $2 million.168 Amortizing the onetime cost over five years and combining 

it with the annual cost gives an 

aggregate annual cost of about 

$528,000.169 Thus, the cost of the 

modifications is $42 annually per 

servicer or 83 cents per disclosure. 

Of the $2 million just described, about 

$1.65 million is the one-time costs for 

small servicers of revising the existing 

disclosure. Amortizing this cost over 

five years requires a payment of $41 by 

each small servicer in each of five years. 

The Bureau is not aware of any 

representative and reasonably 

obtainable data on the prevalence of 

ARMs in the loan portfolios of small 

servicers, so it is not possible to 

estimate the number of disclosures that 

small servicers would produce each 

year. Thus, it is not possible to quantify 

the total annual cost of the 

modifications specifically for small 

servicers. 

The Bureau has taken a number of 

additional steps to mitigate the costs to 

covered persons, including: Exempting 

certain types of loans where 

appropriate, such as ARMs with terms 

of one year or less; eliminating the 

requirement that an annual notice be 

sent when there is no change in rate and 

payment; and grandfathering loans with 

a look-back period of less than 45 days 

originated prior to January 10, 2015; and 

requiring disclosure of the existence of 

a prepayment penalty rather than the 

amount of any prepayment penalty. See 

the section-by-section analysis for 

§ 1026.20(c). 

One industry association commenter 

quoted a similar but less detailed 

analysis in the proposed rule and stated 

that the Bureau did not adequately 

identify the types of costs or the amount 

of those costs that servicers will incur. 

In response, the Bureau has provided 

the additional detail above. 

This commenter also provided a 

description of the types of costs that 

bank servicers would incur, ‘‘as part of 

engaging vendors for * * * technologyrelated projects.’’ 170 According to the 

commenter, a servicer undertaking this 

activity would incur costs for project 

identification and planning, vendor 

selection and due diligence, customized 

programming, adjustments prior to 

launch, and costs for new hardware and 

software. The commenter provided the 

example of a community bank that was 

changing its vendor-provided loan 

processing software. 

While the Bureau appreciates the 

commenter’s detailed analysis of the 

one-time costs associated with engaging 

vendors for technology-related projects, 

the Bureau does not believe that the 

revisions to the § 1026.20(c) payment 

change disclosure qualify as a 

technology-related project on the scale 

described by the commenter. For 

servicers that use vendors, changes to an 

existing disclosure will require software 

updates from the existing vendor and 

some monitoring by the servicer. In 

contrast, the commenter appears to 

describe the selection of a vendor to 

produce an entirely new loan processing 

system. While the loan processing 

system must communicate accurately 

with the servicing system, the 

discussion and example have no direct 

connection to the costs that would be 

incurred by a servicer from 

implementing the revised § 1026.20(c) 

disclosures. The commenter informed 

the Bureau that the vendor that 

produces the disclosures for the 

community bank in the example (i.e., 

the core provider) is different from the 

one providing the loan processing 

system which further indicates that 

these two activities are quite distinct. 

Only two comments provided specific 

estimates for costs associated with 

revising the § 1026.20(c) disclosure. One 

credit union commented that it expects 

this disclosure to cause an additional 

annual expense of over $75,000. One 

industry association referenced a $1 

million upfront cost estimate included 

in a comment by two unidentified large 

servicers on an earlier proposal by the 

Board. However, neither commenter 

provided additional information 

necessary for interpreting these figures, 

determining whether they are consistent 

with the Bureau’s cost analysis, or using 

them in that analysis. Such additional 

information would include the number 

of ARMs serviced, how frequently the 

payments are likely to adjust, and 

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10986 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

171Brent W. Ambrose & Michael LaCour-Little, 

Prepayment Risk in Adjustable Rate Mortgages 

Subject to Initial Year Discounts: Some New 

Evidence, 29 Real Est. Econs. 305 (2001) (showing 

that the expiration of teaser rates causes more ARM 

prepayments, using data from the 1990s). The same 

result, using data from the 2000s and focusing on 

subprime mortgages, is reported in Shane Sherland, 

The Past, Present and Future of Subprime 

Mortgages (Fed. Reserve Bd., Staff Working Paper 

2006–63, 2008); the result that larger payment 

increases generally cause more ARM prepayments, 

using data from the 1980s, appears in James 

Vanderhoff, Adjustable and Fixed Rate Mortgage 

Termination, Option Values and Local Market 

Conditions, 24 Real Est. Econs. 379 (1996). 

172Christopher Mayer et al., The Rise in Mortgage 

Defaults, 23 J. Econ. Persps. 27, 37 (2009) (‘‘Mayer 

et al.’’). 

173Anthony Pennington-Cross & Giang Ho, The 

Termination of Subprime Hybrid and Fixed-Rate 

Mortgages, 38 Real Est. Econs. 399, 420 (2010). 174See Mayer et al., at 37. 

whether the servicer uses vendors or 

does all work in-house. 

The Bureau recognizes that certain 

financial benefits to consumers from the 

revised § 1026.20(c) disclosure may 

have an associated financial cost to 

covered persons. Servicer compensation 

is not directly tied to the interest rate on 

a consumer’s mortgage, but rather to the 

unpaid principal balance. Thus, when a 

consumer refinances a mortgage at a 

lower interest rate, one servicer incurs 

a cost but another receives a benefit. On 

the other hand, if a consumer refinances 

from an adjustable-rate mortgage to a 15- 

year fixed-rate mortgage, then the 

consumer would pay off the unpaid 

principal balance more quickly and 

servicer income would fall. Servicers 

may also receive reduced fee income 

from delinquent consumers (or 

investors) if the notice helps consumers 

avoid delinquency. 

Finally, some of the information 

provided in the revised § 1026.20(c) 

disclosure is also provided in the initial 

interest rate adjustment disclosure 

discussed below. The Bureau believes 

that harmonizing the two disclosures 

mitigates these compliance burdens for 

servicers and reduces the aggregate 

production costs to servicers. 

2. New Initial Interest Rate Adjustment 

Notice for Adjustable-Rate Mortgages 

Dodd-Frank Act section 1418 requires 

servicers and creditors to provide a new, 

one-time disclosure to consumers who 

have hybrid ARMs. The disclosure 

concerns the initial interest rate 

adjustment and, unlike the disclosure in 

§ 1026.20(c), is not provided for interest 

rate adjustments after the first 

adjustment. The Dodd-Frank Act section 

1418 disclosure must be given either (a) 

between six and seven months prior to 

such initial interest rate adjustment or 

(b) at consummation of the mortgage if 

the initial interest rate adjustment 

occurs during the first six months after 

consummation. The savings clause in 

TILA section 128A(c) confers authority 

on the Bureau to extend the notice 

requirement to non-hybrid ARMs in 

addition to hybrid ARMs. 

The final rule implements this 

provision by requiring that the 

disclosure be provided at least 210, but 

not more than 240, days before the first 

payment at the adjusted level is due. 

The Bureau, relying upon the savings 

clause, is broadening the scope of the 

final rule, as proposed, to include ARMs 

that are not hybrid. The disclosure 

includes the content required by the 

statute, with modification to the 

housing counselor and state housing 

finance authority information. The 

disclosure includes certain additional 

information not required by the statute, 

including notice of the existence of any 

prepayment penalty (but not the 

amount). Finally, as explained above, 

the Bureau conducted three rounds of 

consumer testing on these disclosures. 

The disclosure forms were revised after 

each round of testing to improve their 

effectiveness with consumers. 

Potential benefits to consumers. 

Decades of research shows that 

consumers make important decisions 

about housing finance at the initial 

interest rate adjustment. Consumers 

often choose to prepay at or before the 

initial interest rate adjustment and the 

greater the payment shock, the greater 

the likelihood of prepayment. These 

results hold for conventional ARMs 

originated in the 1990s as well as for 

subprime hybrid ARMs (2/28 and 3/27) 

originated in the 2000s.171

More controversial is the question of 

whether payment shock at the initial 

interest rate adjustment causes default. 

One published analysis of data from the 

2000s does not find a causal 

relationship between payment shock at 

the initial interest rate adjustment and 

default.172 However, for consumers with 

certain hybrid ARMs originated in the 

2000s, a substantial number 

experienced an increase in monthly 

payment of at least 5 percent at the 

initial interest rate adjustment, and 

some research finds that the default rate 

for these loans was three times higher 

than it would have been if the payment 

had not changed.173

The information in the interest rate 

adjustment notice would provide a 

number of benefits to consumers with 

closed-end adjustable-rate mortgages. 

These benefits may be broadly 

categorized as facilitating (a) the choice 

of an alternative to making the new 

payment, including refinancing; (b) the 

budgeting of household resources; and 

(c) the accumulation of equity by certain 

consumers (i.e., those with interest-only 

or negatively-amortizing payments). 

Individual items in the disclosure may 

provide more than one of these benefits. 

The final rule requires disclosure of 

the new interest rate and payment—the 

exact amount, where available, or an 

estimate, where exact amounts are 

unavailable. Disclosing an estimate of 

the interest rate and any new payment 

at least 210, but not more than 240, days 

before the first payment at the adjusted 

level is due gives consumers a 

significant amount of time in which to 

pursue alternatives to making payments 

at the adjusted level. When interest rates 

are stable, the estimate is informative 

about the future mortgage payment, and 

consumers benefit from being able to 

plan future budgets or to address a 

problem with affordability, perhaps by 

refinancing. The estimate is less 

informative about the future mortgage 

payment when interest rates are volatile, 

but under any circumstances, an 

estimated payment that is well above 

the highest amount that the consumer 

can afford alerts the consumer to a 

potential problem and the need to 

gather additional information. 

While some consumers with ARMs 

may benefit from disclosure of any 

potential new interest rate and payment 

(or estimates of these amounts) well 

before the first payment at the adjusted 

level is due, the benefits from this 

information are likely greatest when 

provided prior to the initial interest rate 

adjustment. Subsequent interest rate 

adjustments reflect the difference 

between two fully-indexed interest rates 

(i.e., interest rates that are the sum of a 

benchmark rate and a margin). In 

contrast, the initial interest rate 

adjustment may reflect the difference 

between an interest rate that is below 

the fully-indexed rate at the time of 

origination (a so-called ‘‘teaser’’ or 

‘‘introductory’’ rate) and a rate that is 

fully-indexed at the time of adjustment. 

For example, in 2005, the teaser rate on 

subprime ARMs with an initial fixedrate period of two or three years was 3.5 

percentage points below the fullyindexed rate.174 As a result, mortgages 

originated in that year faced a 

potentially large change in the interest 

rate and payment, or ‘‘payment shock,’’ 

at the first adjustment. Furthermore, 

consumers facing the initial interest rate 

adjustment may fail to anticipate even 

the possibility of a change in payment, 

since this is necessarily the first time 

since origination that the payment could 

change. Consumers facing payment 

shock or an unanticipated change in 

payment also benefit from having 

additional time to plan future budgets or 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 10987 

175The current payment allocation would also 

appear on the periodic statement disclosure. 

However, listing the current and expected new 

payment allocation in one disclosure benefits 

consumers by making clear any differences between 

the two allocations. The Bureau recognizes that the 

benefit of information in a particular disclosure 

may be mitigated to the extent that the same 

information is available in other disclosures that are 

provided at the same (or nearly the same) time. 

176For a general discussion of disclosure 

formatting, disclosure testing, and consumer 

benefits, see Hogarth & Merry. 

177Although the reduction in monthly payment 

would likely last for more than six months, the 

benefit unambiguously attributable to the disclosure 

would be the savings in each of six months. 

to address a problem with affordability. 

Thus, consumers facing the initial 

interest rate adjustment may benefit 

from the notice through both the 

information it provides regarding the 

potentially new interest rate and 

payment and the additional time it 

provides consumers to adapt. 

A number of items on the disclosure 

may help the consumer who anticipates 

having problems making the new 

payment. In addition to information on 

the amount of the new payment, the 

disclosure lists alternatives to making 

the new payment and gives a brief 

explanation of each alternative. It 

discloses if a prepayment penalty 

applies, and if so provides information 

about when that prepayment penalty 

may be imposed. It provides 

information on rate limits that may 

affect future payment changes. It 

provides the telephone number of the 

creditor, assignee, or servicer to call if 

the consumer anticipates having 

problems making the new payment. 

Finally, it gives contact information for 

where a consumer can access certain 

lists of homeownership counselors and 

SHFAs. All of this information benefits 

a consumer who anticipates having 

problems with making the new 

payment. 

Finally, certain items on the 

disclosure may facilitate the 

accumulation of equity by consumers 

with interest-only or negativelyamortizing payments. For these 

consumers, the disclosure states the 

amount of both the current and the 

expected new payment allocated to 

principal, interest, and escrow, as 

applicable.175 The disclosure provides 

information about how these payments 

will affect the loan balance. If negative 

amortization occurs as a result of the 

adjustment, the disclosure must state 

the payment required to fully amortize 

the loan at the new interest rate. The 

disclosure alerts consumers with these 

types of loans to features that bear on 

equity accumulation, and it provides 

this information at a time when these 

consumers may be evaluating their 

mortgage terms and considering 

refinancing. 

As discussed above, § 1026.20(d) 

includes formatting requirements for the 

initial interest rate adjustment notice. 

These requirements benefit consumers 

by facilitating consumer understanding 

of the information in the disclosures. 

Except for the date of the notice, the 

final rule requires that the disclosures 

must be provided in the form of a table 

and in the same order as, and with 

headings and format substantially 

similar to, certain forms provided with 

the final rule. The Bureau’s testing 

showed that the consumers who 

participated readily understood the 

information in the notice when the 

terms and calculations were presented 

in the groupings and logical order 

contained in the model forms. While 

there is no formula for producing the 

ideal disclosure, the formatting 

requirements are generally informed by 

decades of consumer testing. Based on 

this anecdotal evidence and the 

Bureau’s own judgment and expertise 

about the marketplace and consumer 

needs and behavior, the Bureau believes 

that disclosures that satisfy the 

formatting requirements likely provide 

greater benefits to consumers than 

disclosures that do not satisfy these 

requirements.176

The Bureau does not have the data 

necessary to quantify the benefits of the 

initial interest rate adjustment notice to 

consumers. Certain consumers with 

ARMs will be aware of the upcoming 

initial interest rate adjustment and the 

possibility of refinancing or (if there is 

a payment adjustment) considering 

alternatives to making a new payment, 

of needing to reallocate household 

resources in light of a new payment, and 

of reviewing the household balance 

sheet in light of an interest-only or 

negatively-amortizing loan. The Bureau 

is not aware of data with which it could 

fully quantify the value of the 

information in the disclosure to these 

consumers or determine the savings to 

them in time and other resources from 

not having to obtain this information 

from other sources. Furthermore, there 

are other consumers with adjustable-rate 

mortgages who may be uninformed or 

misinformed (or perhaps forgetful) 

about the upcoming initial interest rate 

adjustment or the financial implications 

of interest-only and negativelyamortizing loans on equity 

accumulation. The Bureau is not aware 

of data with which it could quantify the 

benefits to these consumers of becoming 

better informed about these features of 

their mortgages. 

Although the Bureau does not have 

the data necessary to quantify the 

consumer benefits of the initial interest 

rate adjustment notice, the following 

hypothetical illustrates how consumers 

are likely to benefit from the 

disclosures. The Bureau estimates that 

approximately 280,000 adjustable-rate 

mortgages will have an initial interest 

rate adjustment in each of the next three 

years. If the new initial interest rate 

adjustment notice prompts just 1 

percent of the consumers who receive 

the new notice to refinance six months 

earlier than they otherwise would, and 

they reduce their monthly mortgage 

payment by $50, then the annual 

savings to consumers would be over 

$1.6 million per year, or about $6 per 

disclosure.177 More generally, 

consumers may benefit whether interest 

rates are rising or falling if the consumer 

would qualify for a mortgage with better 

terms and the notice prompts the 

consumer to shop for one somewhat 

sooner; however, the benefits are more 

likely to occur when interest rates are 

rising since acting sooner would benefit 

the most consumers. 

In response to the proposed rule, the 

Bureau received general comments 

asserting that existing interest rate 

adjustment disclosures are adequate, the 

new disclosures would provide no 

consumer benefits, or the new 

disclosures would produce fewer 

benefits than costs. One industry 

association commented that the existing 

system of interest rate adjustment 

disclosures provided ‘‘substantial 

notice’’ to consumers and no research 

referenced by the Bureau produced 

evidence that the present system needed 

improvement. Another industry 

association commenter similarly stated 

it was not aware of any deficiencies in 

the current ARM adjustment notices, 

and that the Bureau had not provided 

sufficient explanation that dictates 

specific information and formatting 

requirements. Others argued that, even 

if consumers with hybrid ARMs might 

benefit from the initial interest rate 

adjustment notice, consumers with nonhybrid ARMs would receive at most 

small benefits that did not justify the 

costs. 

The Bureau notes that the statute 

specifically requires an early notice of 

the initial interest rate adjustment. As 

discussed above, the earlier notice may 

benefit consumers over and above the 

benefit of the 60 day notice because 

many consumers may be particularly 

unlikely to anticipate the very first 

payment adjustment. Two advance 

notices may catch the attention of more 

consumers than one. 

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178 In discussions such as this of costs to covered 

persons, ‘‘small servicers’’ are servicers that meet 

the size standard for that business established by 

the Small Business Administration. Banks, thrifts, 

and credit unions that service mortgage loans must 

have $175 million or less in assets and other 

servicers must have $7 million or less in average 

annual receipts. 

179The Bureau makes the following assumptions, 

based on discussions with industry. 12,600 

servicers familiarize themselves with the rule for a 

total one-time cost of $523,000. The 8,000 small 

servicers (i.e., servicers that meet the Small 

Business Administration size standard) use 100 

vendors, each of which spends 160 hours 

developing the new disclosure (double the amount 

of revising an existing disclosure) and another 160 

hours validating it (double the amount of validating 

an existing disclosure), all at $72 per hour. This 

gives an additional one-time cost of $2.3 million. 

Thirty-one very large servicers perform these tasks 

in-house, for an additional one-time cost of 

$178,000. This gives total one-time costs of about 

$3 million. The remaining servicers have contracts 

with vendors under which the vendor absorbs all 

one-time costs of a disclosure mandated by 

regulation. 

180 $740,000 = ($3,000,000/5) + $138,500. 

The Bureau did receive five 

comments from industry referring to 

efforts by servicers to improve consumer 

disclosures. These comments, which are 

relevant to both proposed § 1026.20(c) 

and (d), and the Bureau’s response, are 

discussed above in the section-bysection analysis of § 1026.20(c). 

Potential costs to consumers. As 

explained further in the discussion of 

costs to covered persons, the cost to 

covered persons is expected to be about 

$2.67 cents per disclosure. This estimate 

takes into account both one-time 

additional costs (amortized over five 

years) and additional annual production 

and distribution costs. 

Given the moderate cost per 

disclosure and the fact it is given just 

once over the life of the loan, the Bureau 

believes that consumers would see at 

most a minimal increase in fees or 

charges. Servicers may in general 

attempt to shift a cost increase onto 

others and consumers may ultimately 

bear part of an increase that falls 

nominally on servicers. For the initial 

interest rate adjustment notice, 

however, the costs to be shifted are 

small. Furthermore, even if servicers did 

attempt to shift the costs, it is not clear 

that consumers would bear them. 

Consider, for example, servicers who 

bid for servicing rights on mortgages 

originated by others. The additional 

costs associated with providing the 

initial rate adjustment notice may cause 

servicers to bid less aggressively for 

certain servicing rights. In that event, 

lenders or investors may bear some of 

the cost. Servicers may also attempt to 

obtain higher compensation for 

servicing from creditors. Creditors may 

respond by attempting to increase fees 

or charges at origination or by 

increasing the cost of credit. In this case, 

consumers may bear some, but not 

necessarily all of the costs. The relative 

sensitivity of supply and demand in 

these interrelated markets would 

determine the proportion of the cost 

increase borne by different parties, 

including consumers. 

The final rule limits how servicers 

may present the required information in 

the initial interest rate adjustment 

notice. Servicers must present the 

required information in a format 

substantially similar to the format of the 

prescribed model forms. The Bureau 

recognizes the possibility that 

constraints on the way servicers present 

information to consumers may prohibit 

the use of more effective forms that 

servicers are using or may develop. The 

constraints would then impose a cost on 

consumers. 

The Bureau does not believe these 

costs are substantial. As discussed 

above, very few commenters described 

efforts to test and develop superior 

disclosures, and the Bureau is unaware 

of efforts by servicers to develop an 

initial interest rate adjustment notice 

that meets the requirements of the 

Dodd-Frank Act and provides the 

benefits to consumers of the prescribed 

model forms. In contrast, the Bureau 

worked closely with Macro to develop 

the model disclosures, conducted three 

rounds of consumer testing, and revised 

the disclosure after each round. 

The Bureau received numerous 

comments that disclosing an estimate of 

the new monthly payment would 

confuse consumers or lead them to 

make poor decisions. The Bureau 

received similar comments from the 

Small Entity Representatives during the 

Small Business Review Panel process. 

The Bureau believes that clearly stating 

on the form that the new monthly 

payment is an estimate and that 

consumers will receive a notice with the 

exact amounts two to four months prior 

to the date the first payment at the 

adjusted level is due (in cases where the 

interest rate adjustment results in a 

corresponding payment change) will 

mitigate consumer confusion on this 

point. The Bureau notes that DoddFrank Act section 1418 requires 

disclosure of a good faith estimate of the 

new monthly payment. In addition, 

servicers must provide the actual 

amount of the new monthly payment in 

the notice if it is available; and if it is 

not available, then consumers will be 

notified of the actual amount of the new 

monthly payment between 60 and 120 

days before the first payment is due, if 

the interest rate adjustment causes a 

corresponding change in payment, 

pursuant to the prescribed § 1026.20(c) 

disclosure. 

Potential benefits to covered persons. 

The Bureau has carefully considered 

whether there are any significant 

benefits to covered persons from this 

provision. The Bureau has determined 

that there are not. 

Potential costs to covered persons. 

The initial interest rate adjustment 

notice will result in certain compliance 

costs to covered persons. Based on 

discussions with servicers and software 

vendors, the Bureau believes that, in 

general, servicers of all sizes will incur 

minimal one-time costs to learn about 

the final rule. They will generally use 

vendors for one-time software and IT 

upgrades and for producing the 

disclosure. The new disclosure provides 

consumers information that is not 

currently disclosed to them, including 

information that is specific to each loan. 

Servicers (or their vendors) may not 

have ready access to all of this 

additional loan-level information; for 

example, if some of this additional 

information is stored in a database that 

is not regularly accessed by systems that 

produce the current disclosures. 

The Bureau believes that under 

existing vendor contracts, large- and 

medium-sized servicers may not be 

charged for the upgrades but will be 

charged for producing and then 

distributing (i.e., mailing or 

electronically providing) the disclosure. 

Vendors will likely pass along all of 

these costs to small servicers.178

However, when most servicers 

simultaneously need an upgrade, the 

one-time cost is mitigated by the fact 

that the costs of a single vendor may be 

spread among a large number of 

servicers. 

Extrapolating from FHFA data, the 

Bureau estimates that about 280,000 

ARMs will adjust for the first time in 

each of the next three years. Based on 

discussions with industry, the Bureau 

believes the annual production and 

distribution costs for the disclosure is 

$140,000 (50 cents per disclosure). The 

small ongoing costs reflect the fact that 

there will be relatively few initial 

interest rate adjustments on adjustablerate mortgages over the next few years. 

Using both these data sources, the 

Bureau estimates the one-time cost of 

the disclosure for the 12,600 servicers is 

about $3 million.179 Amortizing the onetime cost over five years and combining 

it with the annual cost gives an 

aggregate annual cost of about 

$740,000.180 Thus, the cost of new 

disclosure is $58 annually per servicer 

or $2.67 per disclosure. 

Using a similar methodology, the 

Bureau estimates the one-time cost for 

small servicers of the new disclosure is 

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181TILA section 128A(b). 

about $2.7 million. Amortizing this cost 

over five years requires a payment of 

$58 by each small servicer in each of 

five years. The Bureau is not aware of 

any representative and reasonably 

obtainable data on the loan portfolios of 

small servicers, so it is not possible to 

estimate the number of disclosures that 

small servicers would produce each 

year. Thus, it is not possible to quantify 

the total annual cost of the 

modifications specifically for small 

servicers. 

The Bureau attempted to reduce the 

burden to servicers where it could be 

done with minimal impact on the 

consumer protection purposes of the 

rule. The Bureau mitigates the burden of 

the disclosure, among other ways, by 

requiring the contact information for the 

list of home ownership counselors or 

counseling organization in place of a list 

of individual counseling agencies or 

programs required by the statute, and by 

requiring disclosure of the existence of 

a prepayment penalty in place of the 

maximum amount of the prepayment 

penalty. Additionally, the Bureau 

attempted to harmonize the § 1026.20(c) 

and (d) disclosures both to reduce the 

burden on servicers, and to facilitate 

comprehension by consumers. In 

addition, relative to the statute, the 

Bureau has included an exemption for 

ARMs with a term of one year or less. 

Further, relative to the statute, the 

Bureau has drafted the rule such that 

rate changes occasioned by a 

consumer’s acceptance into a loss 

mitigation arrangement will not trigger 

the requirement for the rate change 

notification. Finally, the Bureau has 

interpreted the statutory requirement 

that the notice be ‘‘separate and distinct 

from all other correspondence’’ 181 to 

mean that, while the notice must be 

provided as a separate document, that 

document may be placed in the same 

envelope as other communications (as 

opposed to requiring a separate 

envelope). 

One industry association cited a cost 

analysis similar to, but less detailed 

than, the cost analysis presented in the 

proposed rule and stated that the 

Bureau did not adequately identify the 

types of costs or the amount of those 

costs that banks will incur. This 

commenter provided a description of 

the types of costs that bank servicers 

would incur, ‘‘as part of engaging 

vendors for * * * technology-related 

projects.’’ In response, the Bureau has 

provided the additional detail above 

and a discussion of the comment in the 

consideration of the costs to covered 

persons of the revised § 1026.20(c) 

disclosure, above. Although the 

disclosure is new, the Bureau believes 

that neither this fact nor the content of 

the disclosure would necessitate a 

technology-related project on the scale 

described by the commenter. 

Another industry commenter 

referenced the $58 cost figure for small 

servicers, which consists of one-time 

costs paid in each of five years. The 

commenter claimed that this figure was 

too low and listed a number of one-time 

and ongoing activities her bank would 

need to undertake to comply. However, 

the commenter did not provide an 

alternative cost figure or explain how 

the activities she listed would constitute 

the alternative figure. The commenter 

did say her bank would have to produce 

over 100 notices per year. The Bureau 

notes that $58 was an average figure for 

one-time costs and that with 100 

notices, a better estimate of her 

institution’s costs (consistent with the 

Bureau’s calculations) would be $2.67 

per disclosure so $267 per year. 

The Bureau recognizes that certain 

financial benefits to consumers from the 

initial interest rate adjustment notice 

may have an associated financial cost to 

covered persons. Servicer compensation 

is not directly tied to the interest rate on 

a consumer’s mortgage, but rather to the 

unpaid principal balance. Thus, when a 

consumer refinances a mortgage at a 

lower interest rate, one servicer incurs 

a cost but another receives a benefit. On 

the other hand, if a consumer refinances 

from an adjustable-rate mortgage to a 

fifteen year fixed-rate mortgage, then the 

consumer would pay off the unpaid 

principal balance more quickly and 

servicer income would fall. Similarly, if 

the notice helps consumers avoid 

delinquency, servicers may receive 

reduced fee income from delinquent 

consumers (or investors). 

Finally, as discussed in part V, the 

Bureau considered but decided not to 

exempt small servicers from the initial 

interest rate adjustment notice. The 

Bureau is not including an exemption 

for small servicers because an 

exemption would deprive certain 

consumers of the seven to eight months 

advance notice before the first payment 

at a new level is due that is provided by 

the disclosure, as well as the 

information about alternatives and how 

to contact various sources of assistance. 

Additionally, the Bureau notes that 

small servicers are exempt from the 

periodic statement requirement of final 

§ 1026.41—one other source of 

information on when an interest rate 

might adjust that is provided to 

consumers. Conversely, the Bureau 

believes that the benefit to small entities 

from an exemption would be small. 

Vendors will spread the one-time 

software and IT costs of the notice over 

many small servicers and the annual 

costs will be small since the notice is 

given just once to each consumer with 

an adjustable-rate mortgage. 

3. Prompt Crediting of Payments and 

Response to Requests for Payoff 

Amounts 

TILA section 129F (as added by DoddFrank Act section 1464(a)) generally 

codifies existing Regulation Z 

§ 1026.36(c)(1)(i) on prompt crediting of 

payments. The final rule requires 

periodic payments (defined as an 

amount sufficient to cover principal, 

interest and escrow (if applicable)) to be 

promptly credited, and provides 

clarification on the handling of partial 

payments (i.e., payments less than a 

periodic payment). 

The final rule clarifies that servicers 

have the option of holding partial 

payments in a suspense account. If 

servicers hold partial payments in a 

suspense account, the servicer must 

disclose the amount on the periodic 

statement if a periodic statement is 

required. If sufficient funds accrue in 

any suspense or unapplied funds 

account to cover a periodic payment, 

such funds must be credited as if a 

periodic payment were received. 

TILA section 129G (as added by 

Dodd-Frank Act section 1464(b)) 

requires that a creditor or servicer of a 

home loan send an accurate payoff 

balance within a reasonable time, but in 

no case more than seven business days, 

after the receipt of a written request for 

such balance from or on behalf of the 

consumer. This generally codifies 

existing Regulation Z § 1026.36(c)(1)(iii) 

on payoff statements. 

The Bureau did not receive comments 

on the proposed Dodd-Frank Act section 

1022(b)(2) analysis or issues closely 

related to that analysis in connection 

with the proposed provisions in 

§ 1026.36(c). Comments on the 

provisions of the proposed rule are 

addressed in the section-by-section 

analysis. 

Potential benefits and costs to 

consumers. The statute largely codifies 

an existing regulation. While the 

existing regulation does not specifically 

address the handling of partial 

payments, the final rule requires 

practices regarding the handling of 

partial payments already followed by 

many servicers. Thus, the benefits and 

costs to consumers from a pre-statute 

baseline are likely small. 

Qualitatively, the provisions on 

prompt crediting, coupled with the 

disclosure on the periodic statement of 

the amount of funds being held in any 

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10990 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

182Reference in parts VII, VIII, and IX to 

‘‘servicers’’ with regard to the final rule for the 

periodic statements, means creditors, assignees, and 

servicers. 

183The Bureau did receive one comment from an 

industry association stating that less than 10% of 

the members in one of its working groups regularly 

use coupon books as a billing method. 

suspense account, should help 

consumers manage and reduce defaults. 

Consumers will better understand when 

their payments are being held in a 

suspense account rather than being 

applied and also when partial payments 

will be applied. Not including late fees 

in the definition of periodic payment 

requires servicers to credit a payment 

that covers principal, interest and 

escrow even if late fees are outstanding. 

Consumers who make such a payment 

benefit from having that payment 

credited. Overall, these provisions of the 

final rule ensure that consumers benefit 

from every effort that they make to pay 

their mortgage debt. 

Potential benefits and costs to covered 

persons. As the statute largely codifies 

an existing regulation, the benefits and 

costs to covered persons from a prestatute baseline are likely small. 

However, neither current Regulation Z 

nor Dodd-Frank Act section 1464(a) 

define what constitutes a ‘‘payment’’ for 

purposes of the crediting requirement. 

Thus, the final rule benefits servicers by 

clarifying the meaning of this term. The 

Bureau believes that many servicers 

already credit payments as required by 

the final rule, and for those that do, this 

clarification is a benefit and is the only 

impact of the rule. 

The Bureau engaged in outreach and 

believes that many servicers already 

comply with the final rule. However, for 

servicers with different crediting 

practices, the final rule may delay the 

receipt of fee income or reduce some 

float income. The Bureau has no data 

with which to determine whether this is 

the case but believes these losses would 

generally be small. The Bureau has 

mitigated the burden of the payoff 

statement provision relative to the 

statute by including a clause allowing 

additional time when providing a payoff 

statement within seven days would not 

be feasible due to certain circumstances. 

4. New Periodic Statement Disclosure 

for Certain Mortgages 

Section 1420 of the Dodd-Frank Act 

requires the creditor, assignee, or 

servicer of any residential mortgage loan 

to transmit to the consumer, for each 

billing cycle, a periodic statement that 

sets forth certain specified information 

in a clear and conspicuous manner. The 

statute also gives the Bureau the 

authority to require servicers 182 to 

require additional content to be 

included in the periodic statement. The 

statute provides an exception to the 

periodic statement requirement for 

fixed-rate loans if the consumer is given 

a coupon book containing substantially 

the same information as the statement. 

The final rule requires the periodic 

statement to include the content listed 

in the statute, as applicable, as well as 

billing information, payment 

application information, and 

information that may be helpful to 

distressed or delinquent consumers. In 

accordance with the statute, the final 

rule provides a coupon book exemption 

for fixed-rate loans when the consumer 

is given a coupon book with certain 

information required by the periodic 

statement. The final rule also provides 

exemptions for small servicers, reverse 

mortgages, and timeshares. The periodic 

statement disclosure would be provided 

to all consumers with a closed-end 

residential mortgage, unless one of the 

exemptions applies. 

Potential benefits to consumers. The 

Bureau does not have representative 

information on the extent to which 

servicers currently provide consumers 

with coupon books, billing statements, 

or periodic statements that comply with 

the final rule.183 The Bureau assumes 

that servicers currently provide 

consumers with basic billing 

information since servicers have an 

incentive to keep collection costs low. 

This information likely includes the 

amount due, the payment due date, and 

the amount of any late payment fee; and 

it may also include information that 

would tend to prompt the consumer to 

contact the servicer if it were missing, 

like the current interest rate and 

perhaps the amount of the payment 

going into escrow (if any). Because such 

information is currently being provided, 

its presence on the periodic statement 

required by final § 1026.41 likely 

provides no benefits or costs relative to 

the baseline. The benefits to consumers 

of these disclosures are discussed 

further in part V. 

There is other information that 

typically appears on billing statements 

and coupon books but is accurate only 

if the consumer always makes the 

scheduled payment on time and no 

other payment. It includes the 

outstanding principal balance, total 

payments made since the beginning of 

the calendar year, and the breakdown of 

payments into principal, interest, and 

escrow. This information is not 

accurate, however, if the consumer 

makes an extra payment, provides a 

partial payment, or misses a payment 

entirely. 

All of the aforementioned information 

appears on the periodic statement 

required by final § 1026.41. However, on 

the periodic statement, the information 

would be accurate even if the consumer 

makes an extra payment, provides a 

partial payment, or misses a payment 

entirely. Consumers generally benefit 

from having accurate information about 

payments in order to monitor the 

servicer, assert errors if necessary, and 

track the accumulation of equity. 

However, delinquent consumers may 

especially benefit from tracking the 

effects of delinquency on equity so they 

can effectively determine how to 

allocate income and consider options 

for refinancing. For these consumers, 

the periodic statement may provide 

large benefits relative to coupon books 

or billing statements that do not provide 

the aforementioned information. 

Finally, there is information that 

simply cannot be provided on a coupon 

book. This includes fees or charges 

imposed since the last periodic 

statement, partial payments, past due 

payments, and a wide range of 

delinquency information and 

information about loan modifications 

and foreclosure. Consumers who are 

more than 45 days delinquent will have 

a delinquency notice included on the 

periodic statement (or provided 

separately to them) providing specific 

information about the delinquency of 

their loan. This is one way the servicer 

may catch the attention of the 

consumer. 

Accurate information about past due 

charges and how fees and charges 

accumulate over time is especially 

useful to distressed or delinquent 

consumers who are managing a variety 

of debts and who want to know the least 

costly way of increasing their total debt 

or the most advantageous way of 

reducing their total debt. For example, 

a consumer with past due amounts on 

a mortgage, a car, and a credit card 

would need information about the past 

due amounts and how the fees and 

charges accumulate in order to 

determine whether a partial or full 

mortgage payment is the most 

advantageous way of reducing total 

debt. This information may also be 

inaccurate, and disclosing it on a 

periodic statement may facilitate the 

detection and correction of errors. 

The final rule includes grouping 

requirements for the format of the 

periodic statement. The grouping 

requirements present the information on 

the periodic statement in a logical 

format and may facilitate consumer 

understanding of the information in the 

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184See Macro Report. 

185The Bureau estimates there are about 60 

million closed-end mortgage loans (first and 

subordinate liens) and about 8 million will be 

exempt from the periodic statement requirement. 

For these estimates, the Bureau aggregated mortgage 

loan counts obtained or derived from the FHFA 

‘‘Home Loan Performance’’ data described above, 

the Board’s Flow of Funds Accounts of the United 

States (statistical release z.1), the data from the 

credit union Call Report and the bank and thrift 

Call Report, the CoreLogic mortgage loan servicing 

data set, and the BBx data set from BlackBox Logic. 

different components of the disclosure. 

The General Design Principles 

discussed in the Macro Final Report 184

include grouping together related 

concepts and figures because consumers 

are likely to find it easier to absorb and 

make sense of financial disclosure forms 

if the information is grouped in a logical 

way. The Bureau also tested model 

periodic statement disclosures that 

satisfy the grouping requirements. As 

discussed above, while there is no 

formula for producing the ideal 

disclosure, the Bureau believes that 

disclosures that satisfy the grouping 

requirement are likely to provide greater 

benefits to consumers than disclosures 

that do not. 

There are two main exemptions to the 

periodic statement requirement. The 

first, provided by statute, is an 

exemption for consumers with fixedrate mortgages who receive coupon 

books that contain certain information. 

As discussed above, the fixed or 

formulaic information on coupon books 

will be accurate for consumers who 

make only scheduled payments. 

Consumers with fixed-rate mortgages 

never have to manage a changed 

payment amount. However, the Bureau 

does not have ready access to data on 

whether they are less likely than 

consumers with ARMs subject to the 

requirements to make additional 

payments, partial payments or miss a 

payment. Therefore, the Bureau cannot 

estimate the extent to which such 

consumers may be substantially worse 

off than consumers with ARMs subject 

to the requirements. 

The Bureau also provides an 

exemption for small servicers. A small 

servicer is defined as a servicer who 

either both (i) services 5,000 or fewer 

mortgage loans and (ii) only services 

mortgage loans for which the servicer or 

an affiliate is the owner or assignee, or 

for which the servicer or an affiliate is 

the entity to whom the mortgage loan 

obligation was initially payable; or who 

is a Housing Finance Agency, as defined 

in 24 CFR 266.5. Such small servicers 

will not have to provide the periodic 

statement. 

As discussed above and in the 

section-by-section analysis of 

§ 1026.41(e)(4), the Bureau believes that 

servicers that meet both conditions 

generally provide consumers with ready 

access to the information on the 

periodic statement required by final 

§ 1026.41, but possibly through other 

channels. Servicers who only service 

loans for which they or an affiliate is the 

owner or creditor face either a reduction 

in the value of an asset on their 

portfolios or the loss of an investment 

in the relationship with the consumer 

which was established by originating 

the loan if they provide poor servicing. 

Servicers that also service relatively few 

loans have an incentive to commit to a 

‘‘high-touch’’ business model that offers 

highly responsive customer service. The 

Bureau believes that servicers that meet 

both conditions work to effectively 

provide their customers with ready 

access to comprehensive information 

about their payments, amounts due and 

other account information. Thus, the 

Bureau believes that the exemption 

produces at most a minimal reduction 

in benefits to the customers of small 

servicers. 

Using a range of data sources, the 

Bureau roughly estimates that 

approximately 52 million consumers 

would receive the periodic statement 

disclosure (taking into account the small 

servicer exemption).185 To illustrate the 

potential benefits of the periodic 

statements, suppose 10 percent of these 

consumers save 15 minutes each year 

because the disclosure provides them 

with information about their loan or 

payments that is not provided by their 

current billing statements or coupon 

books (e.g., a past payment breakdown). 

These consumers might, for example, 

have to spend 15 minutes contacting 

their servicer by phone or some other 

means to obtain the same information. 

This is a savings of 1.3 million hours 

per year, or about $22 million at the 

median wage of $17 per hour. 

The Bureau recognizes that the benefit 

to consumers of information in a 

particular disclosure may be attenuated 

to the extent that the same information 

is available in other disclosures that are 

provided at the same (or nearly the 

same) time. The Bureau received 

numerous comments pointing out 

particular pieces of information on the 

periodic statement that are available to 

consumers on other disclosures such as 

IRS Form 1098; the annual escrow 

statement (for consumers who use 

escrow accounts); State mandated 

notices regarding referral to foreclosure, 

cures, and loss mitigation; bankruptcy 

disclosures; and notices associated with 

the early intervention, continuity of 

contact and loss mitigation provisions 

in the Bureau’s companion proposed 

rulemaking on mortgage servicing, the 

2013 RESPA Servicing Final Rule. 

Individual comments regarding 

disclosures on the periodic statement 

that are duplicative of disclosures 

provided in other documents are 

presented and discussed in part V. 

While consumers may not generally 

benefit from duplicative disclosures, the 

periodic statement consolidates key 

information related to their mortgages, 

including information about their 

payments and the implications of nonpayment that is currently provided in 

different documents. Regardless of 

whether consumers should know which 

of the aforementioned documents 

provide the information they may need 

in a particular situation, and regardless 

of whether consumers should retain 

these documents and keep them readily 

available, a consolidated periodic 

statement benefits consumers who are 

poorly informed about where to find the 

information they may need or who did 

not retain the relevant documents. A 

consolidated disclosure also provides an 

overview of mortgage debt and 

payments that some consumers may 

find easier to understand and more 

informative about the financial 

condition of their households than a 

variety of separate documents. Overall, 

the Bureau believes that providing a 

single integrated document, in addition 

to a number of other communications 

that contain fragments of this 

information, can be more efficient for 

consumers. 

Potential costs to consumers. The 

Bureau received comments claiming 

that the periodic statement generally, or 

particular disclosures in it, could 

produce negative consequences for 

consumers. One industry commenter 

stated that requiring content that may be 

irrelevant to the consumer could detract 

from the actual relevant content. An 

industry association commenter stated 

that the entire periodic statement may 

be unwanted and could cause 

consumers to overlook other important 

information that is provided to them on 

a periodic basis, such as annual escrow 

or private mortgage insurance notices or 

late notices. Another argued that the 

periodic statement should present only 

a snapshot of the consumer’s account 

and that disclosing general policies of 

the servicer would confuse consumers. 

An industry commenter argued that 

requiring information about any loan 

modification the consumer received 

would be confusing. 

The Bureau recognizes that 

consumers are heterogeneous, that some 

will benefit more than others from a 

new disclosure, and that some may even 

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10992 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

186 In discussions of costs to covered persons, 

‘‘small servicers’’ are servicers that meet the size 

standard for that business established by the Small 

Business Administration. Banks, thrifts and credit 

unions that service mortgage loans must have $175 

million or less in assets and other servicers must 

have $7 million or less in average annual receipts. 

187A further complication comes from the use of 

‘‘combined’’ periodic statements. The Bureau 

received a number of comments on this topic. 

Combined periodic statements may contain 

information about mortgage loans and open-end 

loans along with information about savings and 

checking accounts. The timing of the periodic 

statement may limit the ability of servicers to 

combine all of this information in one disclosure. 

Servicers who currently send a billing statement in 

a combined disclosure may therefore incur 

additional distribution costs along with additional 

production costs. See the section-by-section 

analysis of § 1026.41(b) for a full discussion of the 

timing issue and comments. 

188However, servicers who provide coupon books 

to consumers with fixed rate mortgages are required 

to provide a delinquency notice (see 

§ 1026.41(e)(3)(iv)). Since servicers already provide 

some kind of delinquency notice, the costs 

attributable to the rule are most likely small. 

experience negative, unintended 

consequences. However, the Bureau 

believes that the consolidated periodic 

disclosure it developed and tested 

provides consumer benefits. As 

discussed above, servicers receive 

minimal consequential feedback from 

consumers about the quality of servicing 

disclosures. Thus, they have little 

incentive to incur the costs of 

researching and discovering the 

information consumers want in a 

periodic disclosure. The Bureau did 

receive one comment from industry 

referring to its ‘‘consumer tested and 

appreciated’’ periodic statement and 

another arguing against including 

delinquency information in the periodic 

statement since, in the commenter’s 

experience, this information was more 

effective in collection letters. The 

Bureau is aware of other efforts by 

certain servicers to improve their 

disclosures. However, this work does 

not appear to be widespread, and the 

Bureau received only a small number of 

comments about efforts to improve 

disclosures. In contrast, the Bureau 

worked closely with Macro to develop 

the model disclosures, conducted three 

rounds of consumer testing, and revised 

the disclosure based on the results of 

this testing. Based on this anecdotal 

evidence, the comment letters, and the 

Bureau’s expertise in disclosure design 

and consumer behavior, the Bureau 

concludes that consumers in general 

will benefit from the periodic statement 

disclosure even if certain consumers 

may find the disclosure confusing. 

Some or all of the costs attributable to 

the periodic statement provisions may 

be passed through to consumers. As 

explained below, the Bureau believes 

that the annual cost per consumer is 

small. Servicers may in general attempt 

to shift a cost increase onto others and 

consumers may ultimately bear part of 

an increase that falls nominally on 

servicers. For the new periodic 

statement disclosure, however, the costs 

to be shifted are small and so consumers 

would see at most a small cost increase. 

As discussed above, the Bureau is 

adopting grouping requirements for the 

periodic statement disclosure. The 

Bureau recognizes the possibility that 

constraints on the way servicers present 

information to consumers may prohibit 

the use of more effective forms that 

servicers are using or may develop. The 

constraints would then impose a cost on 

consumers. 

The Bureau does not believe these 

costs are substantial. As discussed 

above, very few commenters described 

efforts to test and develop superior 

disclosures, and the Bureau is unaware 

of general efforts by servicers to develop 

a periodic statement that meets the 

requirements of the Dodd-Frank Act and 

provides the benefits to consumers of 

the prescribed model forms. In contrast, 

the Bureau worked closely with Macro 

to develop the model disclosures, 

conducted three rounds of consumer 

testing, and revised the disclosure based 

on the results of this testing. 

Potential benefits to covered persons. 

Providing the content in the periodic 

statement on a regular basis to 

consumers may reduce the frequency 

with which consumers contact the 

servicer for information and reduce the 

time servicers spend answering 

consumer questions. Servicers benefit to 

some extent when consumers detect 

errors quickly, and the information in 

the periodic statement may facilitate 

this. Servicers may also have reduced 

costs when they manage fewer partial 

payments and delinquencies and can 

resolve delinquencies sooner. 

Potential costs to covered persons. 

The periodic statement disclosure 

requirements will result in certain 

compliance costs to non-exempt 

servicers. Regarding the scope of 

coverage, the Bureau believes that about 

380 insured depositories and credit 

unions will not qualify for the small 

servicer exemption (and about 10,800 

will qualify). The insured depositories 

and credit unions that do not qualify for 

the small servicer exemption service 

about 40.4 million loans (those that do 

qualify service about 5.7 million loans). 

Using data sources described in the 

analysis of the small servicer 

exemption, the Bureau estimates that 

there are about 13.9 million closed-end 

mortgage loans serviced by nondepositories. However, the Bureau does 

not have the data necessary to 

accurately estimate the number of 

exempt non-depository servicers or the 

number of loans they service. The 

Bureau believes that the number of 

loans serviced is a small percentage of 

this total given the financial advantages 

of servicing large numbers of loans. 

Regarding costs, based on discussions 

with servicers and software vendors, the 

Bureau believes that, in general, 

servicers of all sizes will incur minimal 

one-time costs to learn about the final 

rule. They will generally use vendors for 

one-time software and IT upgrades and 

for producing the disclosure. The 

revised disclosure provides to 

consumers information that is not 

currently disclosed to them, including 

information that is specific to each loan. 

Servicers (or their vendors) may not 

have ready access to all of this 

additional loan-level information; for 

example, if some of this additional 

information is stored in a database that 

is not regularly accessed by systems that 

produce the current disclosures. 

The Bureau believes that under 

existing vendor contracts, large and 

medium sized servicers may not be 

charged for the upgrades but will be 

charged for producing and then 

distributing (i.e., mailing or 

electronically communicating) the 

disclosure. Vendors will likely pass 

along all of these costs to small 

servicers.186 However, when most 

servicers simultaneously need an 

upgrade, the one-time cost is mitigated 

by the fact that the costs of a single 

vendor may be spread among a large 

number of servicers. 

A particular challenge in estimating 

the cost of the periodic statement 

disclosure requirements comes from the 

lack of information on the extent to 

which servicers currently provide 

consumers with coupon books, billing 

statements, or periodic statements.187

This makes it impossible to quantify the 

impact of the rule and its cost. For 

example, servicers who do not currently 

provide billing statements to consumers 

with adjustable rate mortgages will have 

new production and distribution costs 

for servicing those loans. In contrast, 

servicers who already provide billing 

statements will have new production 

costs but not new distribution costs for 

servicing those loans. Servicers who 

provide coupon books to consumers 

with fixed rate mortgages may not have 

any new production or distribution 

costs for servicing those loans, 

depending on how frequently they 

revise their coupon books.188

The lack of information on these 

current servicing practices makes it 

impossible to determine the impact of 

the rule on the production and 

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189Other comments on the costs of providing the 

periodic statement disclosure are discussed in the 

section-by-section analysis. 

190When a range of costs is reported, these 

estimates use the higher figure. 

191As in the previous discussions of costs in part 

VII, ‘‘small servicer’’ means servicers that meet the 

Small Business Administration size standard. 

distribution of disclosures. Thus, it is 

not possible to accurately determine the 

cost of the rule to covered persons. 

However, the Bureau received a few 

comments that presented costs 

associated with the new periodic 

statement disclosure: 189

• An industry association commenter 

stated that for larger credit unions, the 

mailing costs alone may exceed 

$500,000.00 per year. For smaller credit 

unions these costs would likely be 

upwards of $75,000 to $100,000 per 

year. The commenter also reported that 

one credit union servicing 5,500 

mortgages stated it would incur an 

additional $70,000 in expenses to 

prepare and mail the periodic statement. 

Initial programming and development 

charges could be $65,000 to more than 

$100,000. 

• A credit union servicing 11,000 

mortgage loans commented it would 

have up-front costs of $45,000 to 

$65,000 and monthly production and 

mailing costs of $6,800. 

• A multi-bank financial holding 

company commented that its subsidiary 

banks would have costs of 72 cents per 

statement each month, so $172,800 

annually. 

• A non-depository financial services 

company servicing 4,000 loans 

commented it would incur an initial 

cost of over $5,000 and ongoing costs of 

$40,000. 

• An industry association commenter 

stated that a large credit union in North 

Carolina reported annual costs of 

$500,000 if it cannot use a combined 

statement; smaller credit unions 

reported $10,000 to $25,000 additional 

annual costs. 

From these five comments, the Bureau 

can derive the following four estimates 

of annual costs per loan (assuming 12 

disclosures per year) and three estimates 

of one-time costs per loan:190

Annual costs: $7.42, $8.64, $10.00, 

$12.73. 

One-time costs: $1.25, $5.25, $18.18. 

Regarding the annual costs, the 

commenters do not provide enough 

detail for the Bureau to know if they are 

accurately computing the cost of the 

periodic statement requirement relative 

to the proper baseline. For example, if 

commenters currently produce and mail 

a billing statement, then they should 

deduct the current production and 

mailing costs from those they expect to 

incur from the rule. For both one-time 

and annual costs, the Bureau would 

need to know whether these servicers 

are using vendors and (if so) the 

contract terms with those vendors to 

know if the commenters are accurately 

computing the cost of the rule. 

Setting aside these issues, however, 

the Bureau notes that the median of the 

total annual costs reported by the 

commenters (assuming a five-year 

amortization) is $10.25 per loan. Thus, 

for loans that refinance every five years, 

the periodic statement requirement 

would add about $50 to the cost of the 

loan. The Bureau notes that this amount 

could be recovered at origination with a 

minor fee or through a very small 

increase in the cost of credit to 

consumers. However, the Bureau 

believes that this figure sharply 

overstates the cost of the periodic 

statement requirement relative to the 

proper baseline. Many of these 

consumers already receive billing 

statements, so there would not be any 

additional distribution costs from the 

disclosure, and a cost currently incurred 

is not properly attributed to the rule. 

Finally, the Small Business Review 

Panel stated that a periodic statement 

requirement would impose significant 

burdens on small servicers.191 The 

panel explained that while much of the 

information in the periodic statement 

was already being provided through 

alternative means and most of the 

information is available on request, 

consolidating this information into a 

single monthly dynamic statement 

would be difficult for small servicers. 

The Small Entity Representatives 

expressed that due to their small size, 

they would not be able to have in-house 

expertise and would generally use thirdparty vendors to develop periodic 

statements. Due to their small size, they 

believed they would have no control 

over these vendor costs. Additionally, 

the small servicers have a smaller 

portfolio over which to spread the fixed 

costs of producing periodic statements. 

Such servicers stated they would be 

unable to gain cost efficiencies and 

could not effectively spread the 

implementation costs of periodic 

statements across their loan portfolios. 

Finally, even the costs of mailing 

monthly statements could be significant 

to the extent that small servicers 

currently use alternative information 

methods (such as coupon books for 

adjustable-rate mortgages, or passbooks). 

The Bureau believes that the small 

servicer exemption in § 1026.41(e)(4) 

covers essentially all small insured 

depositories and credit unions. The 

Bureau has only a rough estimate of the 

number of small non-depository 

servicers covered by the exemption, but 

the estimate supports the view that vast 

majority would be exempt. Further 

discussion of the impact of the rule on 

small business is discussed in part VIII 

below. 

The Bureau is mitigating the burden 

of the periodic statement requirement 

relative to the statute by including 

exemptions and relaxing certain 

provisions. In addition to the reverse 

mortgage exemption, the Bureau has 

expanded the small servicer exemption 

both by increasing the loan threshold 

from the proposed 1,000 loans to 5,000 

loans, and by including Housing 

Finance Agencies in the small servicer 

exemption. Further, the Bureau has 

made modifications to the statutorily 

required information that must be 

disclosed on the periodic statement, 

including requiring the existence of any 

prepayment penalty (in place of the 

amount), and by requiring Web site 

information on housing counselors (in 

place of a list of specific housing 

counselors). 

G. Potential Specific Impacts of the 

Final Rule 

1. Depository Institutions and Credit 

Unions With $10 Billion or Less in Total 

Assets, as Described in Dodd-Frank Act 

§ 1026 

Overall, the impact of the rule on 

depository institutions and credit 

unions depends on a number of factors, 

including the institutions’ current 

software and compliance systems and 

the current practices of third-party 

service providers. Based on discussions 

with industry, and taking into account 

the expanded small servicer exemption 

from the periodic statement 

requirement, the Bureau believes that 

larger depositories and credit unions 

will incur only minimal costs from this 

rulemaking. The following analysis 

focuses on depository institutions and 

credit unions with total assets between 

$175 million and $10 billion; the impact 

of the rule on depository institutions 

and credit unions with less than $175 

million in total assets is discussed above 

and in the Final Regulatory Flexibility 

Analysis. 

The initial interest rate adjustment 

notice is a new disclosure. The Bureau 

believes that depository institutions and 

credit unions with total assets between 

$175 million and $10 billion use thirdparty vendors who will, under current 

contracts, absorb the information 

collection and data processing costs. 

The Bureau believes that vendors do not 

absorb the costs of mailing disclosures, 

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192For purposes of assessing the impacts of the 

final rule on small entities, ‘‘small entities’’ is 

defined in the RFA to include small businesses, 

small not-for-profit organizations, and small 

government jurisdictions. 5 U.S.C. 601(6). A ‘‘small 

business’’ is determined by application of Small 

Business Administration regulations and reference 

to the North American Industry Classification 

System (NAICS) classifications and size standards. 

5 U.S.C. 601(3). A ‘‘small organization’’ is any ‘‘notfor-profit enterprise which is independently owned 

and operated and is not dominant in its field.’’ 5 

U.S.C. 601(4). A ‘‘small governmental jurisdiction’’ 

is the government of a city, county, town, township, 

village, school district, or special district with a 

population of less than 50,000. 5 U.S.C. 601(5). 

193 5 U.S.C. 609. 

194The current SBA size standards are found on 

SBA’s Web site at http://www.sba.gov/content/ 

table-small-business-size-standards. 

195 77 FR 57318, 57376–77 (Sept. 17, 2012). 

196See Small Business Review Panel Report. 

197 77 FR 57318, 57376–83 (Sept. 17, 2012). 

and based on discussions with industry 

the Bureau understands that 70–80 

percent of consumers have not elected 

to receive disclosures electronically. 

Relatively few adjustable-rate mortgages 

have been originated in recent years, 

however, and so the number that will 

adjust for the first time in the near term 

will be small. 

The costs to depository institutions 

and credit unions with total assets 

between $175 million and $10 billion 

from the revised § 1026.20(c) disclosure 

will also be minimal. The Bureau 

expects that the information collection 

and data processing costs will largely be 

absorbed by third-party vendors. The 

mailing costs of the revised § 1026.20(c) 

will be the same as the mailing costs of 

the current disclosure. 

Based on discussions with industry, 

the Bureau believes that the vast 

majority of depositories and credit 

unions, of any size, are already in 

compliance with the provisions for 

prompt crediting of payments and 

response to requests for payoff amounts. 

Thus, most of the impact of the final 

rule on depository institutions and 

credit unions with total assets between 

$175 million and $10 billion comes 

from the periodic statement disclosure. 

The Bureau believes that a significant 

number of these institutions will qualify 

for the small servicer exception adopted 

in the final rule. Using FHFA and Call 

Report data, the Bureau estimates that 

92% of institutions in this range and all 

but one of those with assets of $175 

million and below will qualify for the 

exception. 

For those institutions with total assets 

between $175 million and $10 billion 

that do not qualify for the exception, the 

Bureau expects that the information 

collection and data processing costs will 

largely be absorbed by third-party 

vendors. Thus, the main cost factor for 

these institutions is the mailing (or more 

generally, the distribution) costs. For the 

reasons discussed above, the Bureau 

cannot accurately estimate this cost. It is 

reasonable to suppose, however, that 

there would be no new distribution 

costs associated with fixed rate 

mortgages that currently receive billing 

statements. There may also be no new 

distribution costs associated with fixed 

rate mortgages that currently receive 

coupon books; however, servicers who 

provide these consumers with coupon 

books that do not comply with the new 

rule would need to provide them with 

revised coupon books that do comply 

with the new rule. Similarly, it is 

reasonable to suppose that there would 

be no new distribution costs associated 

with adjustable rate mortgages that 

currently receive billing statements. 

There would, however, be new mailing 

costs for adjustable-rate mortgages that 

currently receive coupon books. 

2. Impact of the Provisions on Consumer 

Access to Credit and Consumers in 

Rural Areas 

The consideration of the cost of each 

provision of the final rule above found 

that these costs were extremely small for 

the § 1026.20(c) disclosure, the new 

initial interest rate adjustment notice, 

and the prompt crediting requirement. 

Thus, these provisions will have no 

significant impact on consumer access 

to credit. The Bureau cannot accurately 

estimate the cost of the periodic 

statement requirement, and there is a 

substantial difference between the 

Bureau’s rough estimate of this cost and 

the higher cost figures submitted in 

comments. However, even the higher 

cost figures should not materially 

reduce consumer access to credit given 

that such costs may be recovered at 

origination through a relatively minor 

fee. 

Consumers in rural areas may 

experience impacts from the final rule 

that are different in certain respects 

from the benefits experienced by 

consumers in general. Consumers in 

rural areas may be more likely to obtain 

mortgages from local banks and credit 

unions that service 5,000 loans or fewer 

and only service loans which they 

originated or own. For reason discussed 

above, these servicers likely already 

provide many of the benefits to 

consumers that the final rule is designed 

to provide. These servicers will benefit 

from the exemption to the periodic 

statement requirement in the final rule 

by not incurring the costs associated 

with modifying an existing disclosure or 

creating a new disclosure to comply 

with this requirement. Borrowers in 

turn may benefit, either as mortgagees or 

as customers at these insured 

depositories and credit unions, through 

continued access to a lending and 

servicing model they prefer. 

VIII. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

generally requires an agency to conduct 

an initial regulatory flexibility analysis 

(IRFA) and a final regulatory flexibility 

analysis (FRFA) of any rule subject to 

notice-and-comment rulemaking 

requirements, unless the agency certifies 

that the rule will not have a significant 

economic impact on a substantial 

number of small entities.192 The Bureau 

also is subject to certain additional 

procedures under the RFA involving the 

convening of panel to consult with 

small business representatives prior to 

proposing a rule for which an IFRA is 

required.193

An entity is considered ‘‘small’’ if it 

has $175 million or less in assets for the 

banks, and $7 million or less in revenue 

for non-bank mortgage lenders, 

mortgage brokers, and mortgage 

servicers.194 The Bureau did not certify 

that the proposed rule would not have 

a significant economic impact on a 

substantial number of small entities. 

Thus, the Bureau convened a Small 

Business Review Panel to obtain advice 

and recommendations of representatives 

of the regulated small entities. The 2012 

TILA Servicing Proposal preamble 

included detailed information on the 

Small Business Review Panel.195 The 

Panel’s advice and recommendations 

are found in the Small Business Review 

Panel Report; 196 several of these 

recommendations were incorporated 

into the proposed rule. The 2012 TILA 

Servicing Proposal also included a 

discussion of each of the panel’s 

recommendations in the section-bysection analysis of each section. 

The 2012 TILA Servicing Proposal 

contained an Initial Regulatory 

Flexibility Analysis (IRFA),197 pursuant 

to section 603 of the RFA. In this IRFA 

the Bureau solicited comment on 

whether the burden imposed on small 

entities by the initial interest rate 

adjustment disclosure outweighed the 

consumer protection benefits it would 

afford as well as whether the proposed 

rule would have any impact on the cost 

of credit for small entities. Comments 

addressing the initial rate adjustment 

disclosure are addressed in the sectionby-section analysis above. Comments 

addressing the impact on the cost of 

credit are discussed below. Elsewhere in 

the proposal, the Bureau sought 

comment on the small servicer 

exemption, specifically if ‘‘small 

servicer’’ was properly defined, and if 

the small servicer exemption should be 

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198See part VII.B. for an explanation of prestatute baseline. 

199The commenter does not define small servicer, 

but the commenter does request that the Bureau 

increase the loan threshold in § 1026.41(e)(4) to 

10,000. The Bureau notes that about 200 insured 

depositories and credit unions service over 10,000 

loans and others service some loans for others. 

200This point was made in the proposed DoddFrank Act section 1022 analysis, see 77 FR 57318, 

57369 (Sept. 17, 2012), and is discussed further in 

the final Dodd-Frank section 1022 analysis. 

201See part VII.B and the consideration of costs 

to covered persons from the revised § 1026.20(c) 

notice in part VII.D.1. 

extended to other provisions of the 

proposed rules. These comments are 

addressed in the section-by-section 

analysis of each provision. 

Based on the comments received, and 

for the reasons stated below, the Bureau 

is not certifying that the final rule will 

not have a significant economic impact 

on a substantial number of small 

entities. Accordingly, the Bureau has 

prepared the following final regulatory 

flexibility analysis pursuant to section 

604 of the RFA. 

1. A Statement of the Need for, and 

Objectives of, the Rule 

The Bureau is publishing final rules 

to establish new regulatory protections 

for consumers relating to mortgage 

servicing. The final rule amends 

Regulation Z to implement amendments 

to TILA that were added by sections 

1418, 1420, and 1464 of the Dodd-Frank 

Act. Congress included sections 1418, 

1420, and 1464 in the Dodd-Frank Act 

to address consumer harms relating to 

mortgage servicing. 

The overall objective of the disclosure 

requirements and the payoff statement 

provision is to ensure that consumers 

can obtain basic, accurate information 

about their mortgage loan obligations in 

a timely manner. The amendments to 

Regulation Z are, among other things, 

intended to protect consumers by 

ensuring that a consumer receives 

disclosures in advance of an interest 

rate adjustment with sufficient time to 

explore options available to the 

consumer, if necessary, to avoid 

payment shock. The Bureau also 

proposes to revise the content and 

timeframe of the Regulation Z 

§ 1026.20(c) disclosure for interest rate 

adjustments that result in an 

accompanying payment change, from 

the current between 25 and 120 days 

before the first payment at a new level 

is due, to between 60 and 120 days 

before the first payment at a new level 

is due. 

Further the amendments are intended 

to ensure that a consumer receives a 

monthly mortgage statement that 

discloses the current status of the 

consumer’s mortgage loan obligation. 

The required periodic statement is 

designed to serve a variety of purposes. 

These purposes include informing 

consumers of their payment obligation, 

providing consumers with information 

about their mortgage in an easily read 

and understood format, creating a 

record of transactions to aid in error 

detection and resolution, and providing 

information to distressed or delinquent 

consumers. 

Finally, the amendments are intended 

to protect consumers by imposing 

requirements clarifying the crediting of 

consumer mortgage loan payments and 

by requiring a servicer to provide a 

consumer with a payoff statement 

within a reasonable timeframe. The 

objective of the prompt crediting 

requirement is to ensure that consumers 

benefit from every effort that they make 

to pay their mortgage debt. The final 

rule clarifies the meaning of ‘‘payment’’ 

for purposes of the crediting 

requirement but does not require 

immediate crediting of partial 

payments. 

2. Summary of Significant Issues Raised 

by Comments in Response to the Initial 

Regulatory Flexibility Analysis 

In accordance with section 3(a) of the 

RFA, the Bureau prepared an IRFA. In 

the IFRA, the Bureau estimated the 

possible compliance costs for small 

entities from each major component of 

the rule against a pre-statute baseline.198

The Bureau requested comments on the 

IRFA. An industry association 

submitted a comment letter that referred 

in passing to the Regulatory Flexibility 

Analysis. It did, however, raise three 

significant issues regarding the impact 

of the proposed rule on small servicers. 

First, the commenter stated that it 

would not be effective public policy to 

require servicers smaller than those in 

the top-50 to incur the costs of 

complying with the proposed rule. The 

commenter observed that the top-50 

servicers service 80 percent of 

outstanding mortgage loans and 

compliance with the rule would impose 

significant costs on the well over 12,000 

servicers that service the remaining 20 

percent. The commenter states that 

small servicers’ costs are 

disproportionate to their share of the 

market. Second, the commenter states 

that neither the proposed Dodd-Frank 

Act section 1022 analysis nor the IRFA 

adequately identifies the types of costs 

or the amount of those costs that bank 

servicers will incur as a result of the 

servicing rulemakings. Third, the 

commenter states that given the 

servicing performance of community 

banks and the incentives that drive their 

high level of customer service, there is 

no demonstrated need to apply to small 

servicers those elements of the proposal 

that are not required by the Dodd-Frank 

Act.199

The Bureau has carefully considered 

these comments and responds as 

follows. First, while the Bureau agrees 

that it should be aware of imposing a 

disproportionate share of compliance 

costs on a particular segment of a 

market, it believes that doing so may be 

necessary under certain circumstances. 

The consequences of compliance costs 

for covered persons depend on the size 

of these costs relative to other costs and 

the ability of covered persons to absorb 

or shift these costs. The consequences 

for consumers depend on these factors 

as well as the improvements in products 

and services from compliance by 

servicers. These consequences are not 

summarized by the share of aggregate 

costs imposed on a particular segment. 

The Bureau also notes that the fact that 

a large number of small servicers will 

require new and revised disclosures 

means that each vendor will likely 

spread the one-time costs of developing 

and validating disclosures over a large 

number of servicers.200

Second, the proposed Dodd-Frank Act 

section 1022 analysis and IRFA both 

briefly described the one-time and 

ongoing costs that bank servicers would 

incur as part of the servicing 

rulemaking. Both also provided limited 

quantification of the costs attributable to 

the rule, from a pre-statutory baseline, 

in light of the limited amount of data 

that was reasonably available. As 

discussed in the final Dodd-Frank Act 

section 1022 analysis, the Bureau does 

not believe that the changes required of 

servicers in this rulemaking would 

impose the types of costs that the 

commenter describes.201

Finally, the Bureau notes that it has 

offered good reasons for requiring all 

servicers to provide the revised 

§ 1026.20(c) disclosure. The additional 

content, clear formatting and earlier 

disclosure will benefit consumers who 

need to refinance or move. The Bureau 

also notes that applying the modified 

§ 1026.20(c) disclosure to only certain 

servicers may create confusion as the 

servicers not covered by the new rule 

would still be required to provide the 

existing notices on the existing 

timeframe; having servicers send very 

similar notices on different timeframes 

may be confusing for the marketplace. 

The Bureau received numerous 

comments describing in general terms 

the impact of the proposed rule on small 

servicers and the need for exemptions 

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202See CFPB Press Release on Servicing Proposal. 

203See e.g., Nat’l Ass’n of Fed. Credit Unions, 

CFPB Proposes Mortgage Servicing Rule Changes 

(Aug. 12, 2012) (‘‘NAFCU Compliance Blog’’), 

available at http://www.nafcu.org/News/2012_

News/August/CFPB_proposes_mortgage_servicing_

rule_changes/. 

204See e.g., NAFCU Compliance Blog. 

205 5 U.S.C. 601(6). 

206See SBA Size Standards. 

207See SBA Size Standards. 

208Savings institutions include thrifts, savings 

banks, mutual banks, and similar institutions. 

for small servicers from various 

provisions of the proposed rule. These 

comments, and the Bureau’s responses, 

are discussed in the section-by-section 

analysis, element 5 of this FRFA 

(regarding the small servicer exception 

to the periodic statement requirement) 

and element 6–1 of this FRFA. 

3. Response to the Small Business 

Administration Office of Advocacy 

Comment 

The Small Business Administration 

Office of Advocacy (Advocacy) 

provided a formal comment letter to the 

Bureau in response to the proposed 

rules on mortgage servicing. Among 

other things, this letter expressed 

concern about the following issues: 

Inadequate notice of the proposed rules, 

small servicer exemptions, and the 

effective date of the regulation. 

First, Advocacy expressed concern 

that small entities did not have adequate 

notice of the proposed rules, because 

although the proposed rules were 

posted on the Bureau Web site on 

August 10, 2012 with comments due 60 

days later, the rules were not published 

in the Federal Register until September 

17, 2012. Advocacy was concerned that 

small entities that relied on the Federal 

Register for notice of proposed rules 

would not have sufficient time to 

prepare comments in response to the 

proposed rule. 

The Bureau believes that small 

entities were given adequate notice and 

a full opportunity to comment on the 

proposed rule. The rules were press 

released and published on the Bureau’s 

Web site a full 60 days before the close 

of the comment period.202 The Bureau 

engaged in industry outreach, including 

a publicity campaign around the 

Regulation Room project encouraging 

and facilitating public participation in 

the rulemaking process.203 Further, the 

Bureau believes that, in light of the 

recent attention on the industry, 

including the National Mortgage 

Settlement and market changes, small 

entities would be aware that the DoddFrank Act mandated changes to the 

servicing industry and proposed rules 

would be forthcoming; particularly 

given that trade associations have taken 

an active role in the rulemaking. The 

Bureau believes such trade associations 

have helped to inform small entities of 

the proposed rulemaking.204 In light of 

all this, the Bureau believes that small 

entities were given adequate notice of 

the proposed rules, as evidenced by the 

large number of small entities who 

submitted formal comments. 

Second, Advocacy encouraged the 

Bureau to use its exception authority to 

exempt small servicers from as much of 

the proposed rule as possible, including 

specific requests for exemptions from 

the ARM disclosure and periodic 

statement provisions. The Advocacy 

letter expressed concerns that the new 

§ 1026.20(d) initial interest rate 

adjustment notice would be confusing 

to consumers because the rate could 

change during the six month period 

between when the estimate was 

provided and when the rate actually 

changes, such that this would not 

provide meaningful notice to the 

consumer. Additionally, Advocacy 

encouraged the Bureau to exempt small 

entities from the rate change notification 

for non-hybrid ARMs because the 

changes are not required by the statute. 

Finally, Advocacy encouraged the 

Bureau to exempt all small entities from 

the periodic statement requirements. 

The Bureau carefully considered a 

small servicer exemption in light of 

each of the proposed rules, and a 

complete discussion of the 

consideration of a small servicer 

exemption is found in the respective 

section of the section-by-section 

analysis. The Bureau believes the earlier 

notification of the initial rate change 

will help to ensure a consumer who 

would have difficulty making payments 

at the adjusted rate has sufficient time 

to pursue the alternatives suggested in 

the notification. As discussed above, the 

Bureau believes benefits of the earlier 

timeframe outweigh the potential 

confusion the estimate may cause. 

Further, the Bureau believes that, 

because both hybrid and non-hybrid 

ARMs are subject to the same risk of 

payment shock, it is appropriate to 

expand the scope of the rule to include 

non-hybrid ARMs, as contemplated by 

the savings clause in TILA section 

128A(c). Finally, the Bureau is 

finalizing the proposed small servicer 

exemption for the periodic statement 

requirement, with an expanded 

threshold (5,000 loans). For the reasons 

discussed above in the section-bysection analysis, the Bureau believes 

this is the appropriate scope of the small 

servicer exemption. 

Third, Advocacy encouraged the 

Bureau to provide Small Entity 

Representatives with a sufficient 

amount of time for them to comply with 

the requirements of the proposal, and 

expressed this could take 18–24 months. 

A complete discussion of the effective 

date is found in part VI above. While the 

Bureau understands the new rules will 

take time to implement, the Bureau also 

believes that consumers should have the 

benefit of the additional protections as 

soon as practical. In light of the 

comments received, the Bureau believes 

that 12 months is an appropriate 

implementation period. This time 

period is consistent with (1) the period 

requested by the vast majority of 

comments, (2) outreach conducted by 

the Bureau with vendors and systems 

providers regarding timeframes for 

updating core systems, and (3) the 

implementation period for other 

requirements imposed by the DoddFrank Act or regulations issued by the 

Bureau that may also impact creditors, 

assignees, and servicers. Further, the 

Bureau believes that an approximately 

12-month implementation period 

appropriately balances the needs of 

industry to adjust operations to 

implement the Final Servicing Rules 

with the goal of providing consumers 

the benefit of the protections 

implemented by the Final Servicing 

Rules. 

4. A Description of and an Estimate of 

the Number of Small Entities to Which 

the Rule Will Apply 

As discussed in the Small Business 

Review Panel Report, for purposes of 

assessing the impacts of the proposed 

rule on small entities, ‘‘small entities’’ is 

defined in the RFA to include small 

businesses, small nonprofit 

organizations, and small government 

jurisdictions.205 A ‘‘small business’’ is 

determined by application of SBA 

regulations and reference to the North 

American Industry Classification 

System (NAICS) classifications and size 

standards.206 Under such standards, 

insured depositories and credit unions 

are considered ‘‘small’’ if they have 

$175 million or less in assets, and for 

other financial businesses, the threshold 

is average annual receipts (i.e., annual 

revenues) that do not exceed $7 

million.207

During the Small Business Review 

Panel process, the Bureau identified five 

categories of small entities that may be 

subject to the proposed rule for 

purposes of the RFA: Commercial 

banks/savings institutions 208 (NAICS 

522110 and 522120), credit unions 

(NAICS 522130), firms providing real 

estate credit (NAICS 522292), firms 

engaged in other activities related to 

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209The Bureau has updated these figures from the 

Initial Regulatory Flexibility Analysis, which used 

December 2010 Call Report data as compiled by 

SNL Financial. 

210For banks and thrifts with under $10 billion 

in assets, the Bureau calculated the average unpaid 

principal balance of portfolio mortgages by State for 

credit unions with less than $1 billion in assets and 

applied the State specific figures to these banks and 

thrifts. For banks and thrifts with over $10 billion 

in assets, the Bureau relied on the OCC Mortgage 

Metrics Report, which showed an average unpaid 

principal balance estimate of $175,000. For 

securitized loans, the Bureau relied on the FHFA’s 

Home Loan Performance database, which provides 

data by size of securitized loan book; this yielded 

average unpaid principal balances ranging from 

$141,000 to $189,000. 

credit intermediation (NAICS 522390), 

and small non-profit organizations. 

Commercial banks, savings institutions, 

and credit unions are small businesses 

if they have $175 million or less in 

assets. Firms providing real estate credit 

and firms engaged in other activities 

related to credit intermediation are 

small businesses if average annual 

receipts do not exceed $7 million. 

A small non-profit organization is any 

not-for-profit enterprise which is 

independently owned and operated and 

is not dominant in its field. Small nonprofit organizations engaged in mortgage 

servicing typically perform a number of 

activities directed at increasing the 

supply of affordable housing in their 

communities. Some small non-profit 

organizations originate and service 

mortgage loans for low and moderate 

income individuals while others 

purchase loans or the mortgage 

servicing rights on loans originated by 

local community development lenders. 

Servicing income is a substantial source 

of revenue for some small non-profit 

organizations while others receive most 

of their income from grants or 

investments. 

The following table provides the 

Bureau’s estimate of the number and 

types of entities to which the rule will 

apply: 

For commercial banks, savings 

institutions, and credit unions, the 

number of entities and asset sizes were 

obtained from December 2011 Call 

Report data as compiled by SNL 

Financial.209 Banks and savings 

institutions are counted as engaging in 

mortgage loan servicing if they hold 

closed-end loans secured by one to four 

family residential property or they are 

servicing mortgage loans for others. 

Credit unions are counted as engaging 

in mortgage loan servicing if they have 

closed-end one to four family mortgages 

in portfolio, or hold real estate loans 

that have been sold but remain serviced 

by the institution. 

For firms providing real estate credit 

and firms engaged in other activities 

related to credit intermediation, the 

total number of entities and small 

entities comes from the 2007 Economic 

Census. The total number of these 

entities engaged in mortgage loan 

servicing is based on a special analysis 

of data from the Nationwide Mortgage 

Licensing System and Registry (NMLS) 

and is current as of Q1 2011. The total 

equals the number of non-depositories 

that engage in mortgage loan servicing, 

including tax-exempt entities, except for 

those mortgage loan servicers (if any) 

that do not engage in any mortgagerelated activities that require a State 

license. The estimated number of small 

entities engaged in mortgage loan 

servicing is based on predicting the 

likelihood that an entity’s revenue is 

less than the $7 million threshold based 

on the relationship between servicer 

portfolio size and servicer rank in data 

from Inside Mortgage Finance. 

Non-profits and small non-profits 

engaged in mortgage loan servicing 

would be included under real estate 

credit if their primary activity is 

originating loans and under other 

activities related to credit 

intermediation if their primary activity 

is servicing. The Bureau has not been 

able to separately estimate the number 

of non-profits and small non-profits 

engaged in mortgage loan servicing. 

These non-profits may list loan 

servicing income on the IRS Form 990 

Statement of Revenue, but it is not 

possible to search public databases on 

non-profit entities according to what 

they list on the Statement of Revenue. 

The Bureau is exempting servicers 

that service 5,000 mortgage loans or 

less, all of which the servicer or an 

affiliate owns or originated, from the 

new periodic statement disclosure 

requirements in § 1026.41. The Bureau 

estimates that all but one insured 

depository or credit union that meets 

the SBA asset threshold will qualify for 

the exemption. The Bureau’s 

methodology for this estimate is 

straightforward in the case of credit 

unions. The credit union Call Report 

presents the number of mortgages held 

in credit union portfolios and the 

amount of assets. The Bureau could 

readily determine which credit union 

small servicers (as defined by the SBA 

asset threshold) serviced 5,000 mortgage 

loans or less. In contrast, the bank and 

thrift Call Report does not present the 

number of mortgages, only the aggregate 

unpaid principal balance, and the 

amount of assets. The Bureau developed 

estimates of the average unpaid 

principal balance at banks and thrifts of 

different sizes and use this with the 

information on aggregate unpaid 

principal balance to derive loan counts 

at each bank and thrift.210 The Bureau 

could then determine which bank and 

thrift small servicers (as defined by the 

SBA asset threshold) serviced 5,000 

mortgage loans or less. 

It is not possible to observe whether 

the loans that servicers are servicing for 

others were originated by those 

servicers. However, the Bureau believes 

that all insured depositories and credit 


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211 In the proposed rule, the Bureau stated that it 

was working to gather data from the Nationwide 

Mortgage Licensing System and Registry (NMLS) 

that would be additional to the data used in Table 

1. The Bureau considered that this additional data 

might allow the Bureau to refine its estimate of the 

number of small entity non-depositories that would 

be covered by the proposed periodic statement 

exemption in the proposed 2012 TILA Servicing 

Proposal. The Bureau did obtain additional data 

from the NMLS. This data, however, does not 

contain information directly about mortgage 

servicing revenue and mortgage loans serviced and 

it has limited information with which to derive 

these amounts. The Bureau has therefore not used 

this additional NMLS data to estimate the number 

of small entity non-depositories that would be 

covered by the exemption in this final rule. The 

Bureau also requested that commenters submit 

relevant data. All probative data submitted by 

commenters were discussed in this document. 

212This calculation assumes the servicer receives 

35 basis points on each dollar of unpaid principal 

balance. Typical annual servicing fees are 25 basis 

points for prime fixed-rate loans, 37.5 basis points 

for prime ARMs, 44 basis points for FHA loans, and 

50 basis points for subprime loans; See Larry 

Cordell et al., The Incentives of Mortgage Servicers: 

Myths and Realities, at 15 (Fed. Reserve Bd., 

Working Paper No. 2008–46, 2008). The conclusion 

of the analysis would be the same regardless of 

which figure is used. 

unions that meet both the SBA asset 

threshold and the loan count threshold 

likely qualify for the exception. In 

principle, these entities may not qualify 

for the exception because they do not 

meet the other conditions of the 

exception, i.e., they service loans that 

they did not originate and do not own. 

The Bureau believes that this is 

extremely unlikely, however. First, most 

entities servicing loans they did not 

originate and do not own most likely 

view servicing as a stand-alone line of 

business. In this case they would most 

likely choose to service substantially 

more than 5,000 loans in order to obtain 

a profitable return on their investment 

in servicing. Additionally, the Bureau 

believes it is highly unlikely that 

insured depositories and credit unions 

with $175 million in assets or less 

choose to make this investment, 

preferring to use their assets to support 

other activities. Taking both factors into 

account, the Bureau believes that 

essentially all insured depositories and 

credit unions that meet the SBA 

threshold and the loan count condition 

qualify for the exception. 

The Bureau does not have the data 

necessary to accurately estimate the 

number of small entity non-depositories 

that would be covered by the 

exemption.211 To obtain a rough 

estimate, the Bureau notes that $7 

million in servicing revenue would be 

generated from an aggregate unpaid 

principal balance of $2 billion.212 The 

Bureau estimates that all but 4 percent 

of insured depositories and credit 

unions servicing an aggregate unpaid 

principal balance of $2 billion or less 

service 5,000 loans or less. Assuming a 

similar relationship between servicing 

revenue and loan counts holds for nondepository servicers, at least for 

relatively small depository and nondepository servicers, all but 4 percent of 

non-depository servicers would service 

5,000 loans or less. This estimate and 

the limited data available imply that 768 

(all but 4 percent of 800, or 32) nondepository servicers would service 

5,000 loans or less. The Bureau 

considers these figures to be the best 

available approximations to the number 

of non-depository servicers that would 

and would not qualify for the 

exemption. 

5. Projected Reporting, Recordkeeping, 

and Other Compliance Requirements 

The final rule does not impose new 

reporting or recordkeeping 

requirements. The final rule does, 

however, impose new compliance 

requirements on certain small entities. 

The requirements on small entities from 

each major component of the rule are 

presented below. The Bureau discusses 

impacts against a pre-statute baseline. 

Compliance requirements. As 

discussed in detail in the section-bysection analysis above, the final rule 

imposes new compliance requirements 

on servicers. The final rule requires 

initial interest rate adjustment 

notifications, revised subsequent 

interest rate adjustment notifications, 

new periodic statement disclosures, and 

certain changes to the prompt crediting 

and payoff balance provisions of 

Regulation Z. As discussed in the DoddFrank Act section 1022 analysis in part 

VII above, the Bureau believes that 

small servicers will incur one-time costs 

to learn about the final rule and will 

generally use vendors for one-time 

software and IT upgrades. Small 

servicers will also generally use vendors 

for producing and distributing (i.e., 

mailing or electronically 

communicating) the disclosures. The 

Bureau believes that vendors will likely 

pass along all of these costs to small 

servicers. However, the one-time cost to 

each small servicer will be mitigated by 

the fact that the costs of a single vendor 

will be spread among a large number of 

servicers. The ongoing costs of the ARM 

disclosures to each small servicer will 

be mitigated by the relatively small 

number of ARMs that currently exist. 

The one-time and ongoing costs of the 

periodic statement disclosure will be 

mitigated by the exemption for smaller 

servicers (as defined in § 1026.41(e)(4)). 

Section 1026.20(c) generally amends 

the timing and content requirement for 

ARMs to provide a disclosure prior to 

each interest rate adjustment that effects 

a change in payment. This change will 

likely impose a one-time cost on small 

entities to update their system to 

comply with this provision. The Bureau 

reduces the burden on small entities, 

among other ways, by providing model 

forms which can be used to ease 

compliance, by providing exemptions 

for loans with a term of one year or less, 

by requiring similar information to that 

in the § 1026.20(d) notice, and by 

entirely eliminating the current annual 

disclosure that is required when over 

the course of a year, no interest rate 

adjustment causes a payment change. 

Section 1026.20(d) generally requires 

a new disclosure for the initial interest 

rate adjustment of an adjustable-rate 

mortgage. The new disclosure will 

likely impose one-time and ongoing 

costs on servicers. Servicers will need to 

obtain system upgrades from vendors or 

make programming changes themselves. 

One Small Entity Representative 

reported the changes could take two to 

four days of IT support; these would be 

one-time costs. The Bureau reduces the 

burden on small entities, among other 

ways, by providing model forms which 

can be used to ease compliance, 

ensuring similarities between this and 

the § 1026.20(c) notice, and by 

providing exemptions for loans with a 

term of one year or less. 

Section 1026.36(c)(1) requires prompt 

crediting of periodic payments, and 

allows that partial payments may be 

held in suspense accounts subject to 

certain requirements. Compliance with 

this provision should impose minimal 

additional costs as prompt crediting of 

payments is already required by existing 

Regulation Z. Although many small 

entities reported they do not use 

suspense accounts, small servicers who 

do use suspense accounts may be 

required to update their systems to 

comply with this provision. 

Section 1026.36(c)(3) requires payoff 

balances to be provided within seven 

business days unless exceptional 

circumstances apply. Compliance with 

this provision should impose no 

significant additional cost as this 

essentially codifies existing Regulation 

Z § 1026.36(c)(1)(iii) provisions on 

payoff statements, except that the 

current provision requires payoff 

statements to be provided within a 

reasonable time and creates a safe 

harbor for responses provided within 

five business days. 

Section 1026.41 generally requires 

servicers to provide a periodic 

statement. Servicers may be required to 

update their systems to comply with 

this provision. The periodic statement 

requirement imposes one-time and 

ongoing costs on small servicers. The 

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213This is the average unpaid principal balance 

for first-lien residential mortgages at the largest 

national banks, which at the time of the report 

accounted for 63 percent of all outstanding 

mortgages; See OCC Mortgage Metrics Report. 

214On the other hand, one industry commenter 

reported holding 2,555 loans totaling $440 million, 

so approximately $172,000 per loan. The Bureau 

notes that only one of these four commenters meets 

the Small Business Association threshold for a 

small servicer. 

215Credit Unions report the number and aggregate 

balance of mortgages held in portfolio on their Call 

Report. From these reports the Bureau calculated 

the average unpaid principal balance of portfolio 

mortgages by State for credit unions with less than 

$1 billion in assets and applied the State specific 

figures to banks and thrifts under $10 billion in 

assets. For securitized loans the Bureau derived the 

average unpaid principal balance based upon the 

size of the securitized loan book using the FHFA’s 

Home Loan Performance database, which yielded 

balances ranging from $141,000 to $189,000. 

specific types of costs incurred by a 

servicer depend on whether the servicer 

produces the periodic statement inhouse or uses a third-party vendor. Inhouse one-time costs include the 

development of a new form, system 

reprogramming or acquisition, and 

perhaps new or updated software. Inhouse ongoing costs for production 

include additional system use and staff 

time. In-house ongoing costs would also 

include paper, printing, and mailing 

costs for distributing the periodic 

statement to consumers who do not give 

permission to receive the disclosure 

electronically. Vendors may also charge 

an initial one-time cost for developing a 

new form as well as ongoing costs for 

producing and distributing the 

statement. The Bureau reduces the 

burden on small entities, among other 

ways, by providing sample forms which 

can be used to ease compliance with the 

final rule, by providing a coupon book 

exemption for certain fixed-rate 

mortgages, and by providing a small 

servicer exemption for certain small 

entities. 

The Small Entity Representatives who 

use vendors stated that they did not 

know what their vendors would charge 

to enable them to comply with the new 

periodic statement requirement. The 

Small Entity Representatives agreed that 

the one-time charge would be different 

from what they would be charged if they 

were the only entity making the change. 

Vendors can spread the one-time costs 

of new regulatory requirements over 

many servicers. 

In accordance with Dodd-Frank Act 

section 1420, the final rule includes a 

coupon book exemption for fixed-rate 

loans where the consumer is given a 

coupon book with certain of the 

information required by the periodic 

statement. It is not possible to estimate 

the share of residential mortgage loans 

serviced by small servicers that would 

qualify for this exemption. Many of the 

Small Entity Representatives reported 

that they provide consumers with 

coupon books for ARMs. However, there 

is no data with which to estimate the 

percentage of small servicer portfolio 

loans that are in fixed-rate mortgages. 

Based on anecdotal reports, the Bureau 

understands that many small servicer 

portfolio loans are adjustable-rate 

mortgages. 

Finally, the rule includes a small 

servicer exemption. In the proposed 

rule, the Bureau provided an exemption 

from the periodic statement requirement 

for servicers that serviced 1,000 or fewer 

loans, all of which they either owned or 

had originated. The initial regulatory 

flexibility analysis provided a 

preliminary analysis of the exemption 

and stated that all but 13 small insured 

depositories and credit unions and 65 

percent of small entity non-depositories 

would be covered by the exemption. As 

was explained in the section-by-section 

analysis of proposed paragraph 41(e)(4), 

this calculation was based on the 

assumption that the average unpaid 

principal balance on the 1,000 loans 

was $175,000.213 Data from the bank 

and thrift Call Report on total unpaid 

principal balance of loans serviced by 

each bank or thrift then allowed the 

Bureau to estimate the number of small 

insured depositories and credit unions 

that would be covered by the 

exemption. The Bureau solicited 

comment on all aspects of the proposed 

exemption and asked interested parties 

to provide information relating to the 

exemption. 

Comments received. The Bureau 

received a number of comments from 

banks and thrifts regarding the average 

unpaid principal balance of loans they 

originate or service. One industry 

commenter stated that the average size 

of loans it serviced was about $55,000 

and that the average mortgage in the 

State of Oklahoma was about $106,000. 

Another stated that the average size of 

loans in its portfolio was less than half 

the Bureau’s figure and that at 

origination it would lend only about 

$120,000 on the median-valued house 

in the zip code of its main office. 

Another stated that it serviced 1,800 

loans with an average loan size of just 

under $70,000, and that the proposed 

threshold penalizes banks that 

specialize in moderately-priced 

homes.214

In response to these comments, the 

Bureau performed additional analysis of 

Call Report data from banks, thrifts and 

credit unions. In particular, careful 

examination of loan count information 

from the credit union Call Report 

allowed the Bureau to improve its 

estimate of the likely average unpaid 

principal balance of loans serviced by 

banks that meet the SBA threshold for 

a small servicer. The Bureau has 

concluded that the likely average 

unpaid principal balance of loans 

serviced by insured depositories and 

credit unions that meet the SBA 

threshold is closer to $70,000.215 The 

Bureau also concludes that about 100 

servicers meeting the threshold likely 

service more than 1,000 loans. 

On the basis of this additional 

analysis, the final rule increases the 

loan count threshold for the exemption 

from 1,000 loans to 5,000 loans. The 

Bureau’s estimate of the number of 

small bank and small non-bank 

mortgage servicers that will be exempt 

under the new threshold were presented 

in element 4 of this FRFA, above. 

Estimate of the classes of small 

entities which will be subject to the 

requirement. Section 603(b)(4) of the 

RFA requires an estimate of the classes 

of small entities which will be subject 

to the requirement. The classes of small 

entities which will be subject to the 

reporting, recordkeeping, and 

compliance requirements of the 

proposed rule are the same classes of 

small entities that are identified above 

in part VIII.B.4. 

Section 603(b)(4) of the RFA also 

requires an estimate of the type of 

professional skills necessary for the 

preparation of the reports or records. 

The Bureau anticipates that the 

professional skills required for 

compliance with the proposed rule are 

the same or similar to those required in 

the ordinary course of business of the 

small entities affected by the proposed 

rule. Compliance by small entities that 

will be affected by the rule will require 

continued performance of the basic 

functions that they perform today: 

Generating disclosure forms, crediting 

partial payments from consumers either 

immediately or when they constitute a 

full payment, and responding to 

requests for payoff statements. 

6–1. Description of the Steps the Agency 

Has Taken To Minimize the Significant 

Economic Impact on Small Entities 

The Bureau understands the new 

provisions will impose a cost on small 

entities, and has attempted to mitigate 

the burden wherever it can be done 

without unduly diminishing consumer 

protection. The section-by-section 

analysis of each provision contains a 

complete discussion of the following 

steps taken to minimize the burden. 

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11000 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

Regulation Z § 1026.20(c) Disclosure for 

Adjustable-Rate Mortgages 

The Bureau is making changes to the 

existing § 1026.20(c) disclosure for 

ARMs. The Bureau has attempted to 

mitigate the burden of the changes to 

the § 1026.20(c) notice by modifying the 

final rule from the proposed 

requirements on prepayment penalties 

and housing counselors, and by 

increasing the flexibility in the model 

forms, for the same reasons discussed in 

the discussion of § 1026.20(d) 

immediately below. Additionally, the 

Bureau is mitigating the burden by 

including exemptions in the 

§ 1026.20(c) rule for loans with terms of 

one year or less. Finally, the Bureau is 

eliminating the annual § 1026.20(c) 

notice for interest rate adjustments that 

do not cause changes in payment. The 

Bureau considered but decided not to 

exempt small servicers, as they are 

currently providing this disclosure. 

Regulation Z § 1026.20(d) New Initial 

Interest Rate Adjustment Notice for 

Adjustable-Rate Mortgages 

Dodd-Frank Act section 1418 requires 

servicers to provide a new disclosure to 

consumers who have hybrid ARMs 

regarding the initial interest rate 

adjustment. The Bureau requires the 

initial interest rate adjustment notice for 

hybrid (1/3, 1/5, etc.) as well as ARMs 

that are not hybrid (1/1, 3/3, 5/5, etc.). 

The Bureau has attempted to mitigate 

the burden of the notice by modifying 

the final rule from the proposed 

requirements on prepayment penalties 

and housing counselors, and by 

increasing the flexibility in the model 

forms. 

First, due to the nature of prepayment 

penalties, disclosing the amount of a 

prepayment penalty is significantly 

more burdensome than disclosing the 

existence of a prepayment penalty and 

the date it expires. Only certain 

consumers are interested in the amount 

of the prepayment penalty; such 

consumers can obtain this information 

by contacting their servicer. Thus, the 

final rule requires only the existence of 

a prepayment penalty (as well as the 

expiration date, and servicer contact 

information) in place of the amount. 

Second, the Bureau is amending the 

final rule by removing the requirement 

to include contact information for the 

State housing authority for the State 

where the consumer resides (as required 

by the proposal), or the even more 

burdensome requirement of providing a 

list of individual counselors (as required 

by the statute). Instead the Bureau is 

requiring disclosure of: (1) The HUD or 

Bureau Web site on homeownership 

counselors and counseling agencies, (2) 

the HUD toll free telephone number for 

the HUD list of homeownership 

counselors and counseling agencies, and 

(3) the Bureau Web site for locating 

State housing finance authorities. Third, 

as discussed in the section-by-section 

analysis of the initial interest rate 

adjustment disclosure, the Bureau has 

included commentary highlighting the 

flexibility of the model forms to allow 

for other types of products and 

consumer situations. The Bureau 

believes these changes reduce the 

burden on small servicers, without 

greatly diminishing the consumer 

protection provided by this rule. 

Finally, the Bureau has drafted the 

initial ARM interest rate adjustment 

notice to parallel the ongoing 

§ 1026.20(c) ARM disclosures to further 

reduce the implementation and 

compliance burden. 

Additionally, the Bureau considered 

but decided not to adopt certain 

alternatives, including the following: 

Eliminating the notice altogether, 

eliminating the estimate from the notice, 

exempting small servicers from the 

notice, and limiting the notice to only 

hybrid ARMs (rather than all ARMs). 

The Bureau reached this decision based 

on the following considerations. First, 

the Bureau believes the statutorilyrequired good-faith estimate provides 

important information to consumers; the 

Bureau believes the value of this 

information outweighs the potential risk 

of confusion. Second, the Bureau has 

decided it would not be appropriate to 

exempt small servicers from the 

§ 1026.20(d) notice. As discussed above 

in the section-by-section analysis of 

§ 1026.20(d), an exception would 

deprive certain consumers of advance 

notice seven to eight months before the 

first payment at a new level would be 

due. Without this advance notice, 

consumers may not have sufficient time 

to weigh their alternatives and pursue 

alternative actions. Finally, the Bureau 

believes it is appropriate to require the 

§ 1026.20(d) notice for all ARMs. Both 

hybrid ARMs and those that are not 

hybrid may subject consumers to the 

same payment shock that the ARM 

disclosure was designed to address. 

Accordingly, the Bureau believes that 

the underlying rationale for the 

§ 1026.20(d) notice is equally applicable 

to all ARMs, whether hybrid or nonhybrid, and should be extended to all 

ARMs. 

Prompt Crediting and Request for Payoff 

Amounts 

The rules on prompt crediting and 

payoff statements clarify the definition 

and crediting of payments, the handling 

of partial payments, the use of suspense 

accounts, and the time permitted for 

providing a payoff statement. Small 

servicers are generally already in 

compliance with these rules. For this 

reason, among others, the Bureau did 

not adopt a small servicer exemption. 

The Bureau has attempted to mitigate 

the burden of the rules by including 

flexibility in the rule which allows, but 

does not mandate, suspense accounts 

and by including an exemption to the 

requirement to provide payoff 

statements within seven business days 

when circumstances make that timeline 

infeasible. First, the final rule allows, 

but does not require suspense accounts. 

This flexibility allows the variety of 

current business practices to continue. 

Servicers who currently use suspense 

accounts will not have to eliminate this 

practice. Likewise, servicers who 

currently credit or return partial 

payments will not have to incur the 

burden of establishing suspense 

accounts. Second, the Bureau included 

an exemption in the provision 

addressing payoff statements. This 

exemption allows payoff statements to 

be provided in a reasonable time when 

seven business days is not feasible 

because a loan is in bankruptcy or 

foreclosure, because the loan is a reverse 

mortgage or shared appreciation 

mortgage, or due to natural disasters or 

other similar circumstances. This 

exemption eases the burden of the 

provision addressing payoff statements. 

Finally, the Bureau considered but 

decided not to require prompt crediting 

of partial payments, and requiring 

application of an accumulated full 

payment in a suspense account to the 

oldest outstanding amount due. Instead, 

the final rule gives servicers the option 

of allowing partial payments to be sent 

to a suspense account. The Bureau 

believes this flexibility is less 

burdensome than requiring immediate 

application of partial payments. 

Periodic Statements 

Dodd-Frank Act section 1420 requires 

servicers to provide a new periodic 

statement to the consumer for each 

billing cycle. The rule would generally 

require the content listed in the statute, 

additional billing information, and 

payment application information. Thus, 

the statutory disclosure requirements 

would impose a smaller economic 

burden on small servicers than would 

the Bureau’s regulatory disclosure 

requirements. 

As discussed above in element four of 

this FRFA, the Bureau believes it has 

largely mitigated the burden of the 

periodic statement requirement on 

servicers that meet the size standards 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 11001 

216 5 U.S.C. 603(d). 

217Email from Tom Sullivan, U.S. Chamber of 

Commerce, to Mitch Hochberg, U.S. Consumer Fin. 

Protection Bureau (Nov. 13, 2012) (ex-parte 

communication available at http://www.regulations.

gov/#!documentDetail;D=CFPB–2012–0033–0183). 

established by the SBA. For servicers 

who do not receive the benefit of this 

exemption, the Bureau has mitigated the 

burden by modifying the requirements 

on the disclosure of the prepayment 

penalty and the information on housing 

counselors, as discussed above. 

Additionally, the Bureau considered, 

but decided not to adopt the following 

alternatives: Limiting the periodic 

statement disclosure to the DFA 

requirements, requiring the use of a 

specific form, limiting the small servicer 

exemption to servicers servicing 1,000 

or fewer loans, and requiring alternative 

compliance for smaller servicers who 

have the advantage of the small servicer 

exemption. 

6–2. Description of the Steps the Agency 

Has Taken To Minimize Any Additional 

Cost of Credit for Small Entities 

Section 603(d) of the RFA requires the 

Bureau to consult with small entities 

regarding the potential impact of the 

proposed rule on the cost of credit for 

small entities and related matters.216 To 

satisfy these statutory requirements, the 

Bureau provided notification to the 

Chief Counsel for Advocacy of the Small 

Business Administration on April 9, 

2012 that the Bureau would collect the 

advice and recommendations of the 

same Small Entity Representatives 

identified in consultation with the Chief 

Counsel through the Small Business 

Review Panel process concerning any 

projected impact of the proposed rule 

on the cost of credit for small entities as 

well as any significant alternatives to 

the proposed rule which accomplish the 

stated objectives of applicable statutes 

and which minimize any increase in the 

cost of credit for small entities. The 

Bureau sought to collect the advice and 

recommendations of the Small Entity 

Representatives during the Small 

Business Review Panel outreach 

meeting regarding these issues because, 

as small financial service providers, the 

Small Entity Representatives could 

provide valuable input on any such 

impact related to the proposed rule. 

At the time the Bureau circulated the 

Small Business Review Panel materials 

to the Small Entity Representatives in 

advance of the Small Business Review 

Panel outreach meeting, it had no 

evidence that the proposals under 

consideration would result in an 

increase in the cost of business credit 

for small entities. Instead, the summary 

of the proposals stated that the 

proposals would apply only to mortgage 

loans obtained by consumers primarily 

for personal, family, or household 

purposes and the proposals would not 

apply to loans obtained primarily for 

business purposes. 

At the Small Business Review Panel 

outreach meeting, the Bureau asked the 

Small Entity Representatives a series of 

questions regarding cost of business 

credit issues. The questions were 

focused on two areas. First, the Small 

Entity Representatives were asked 

whether, and how often, they extend to 

their customers closed-end mortgage 

loans to be used primarily for personal, 

family, or household purposes but that 

are used secondarily to finance a small 

business, and whether the proposals 

then under consideration would result 

in an increase in their customers’ cost 

of credit. Second, the Bureau inquired 

as to whether, and how often, the Small 

Entity Representatives take out closedend, home-secured loans to be used 

primarily for personal, family, or 

household purposes and use them 

secondarily to finance their small 

businesses, and whether the proposals 

under consideration would increase the 

Small Entity Representatives’ cost of 

credit. 

The Small Entity Representatives had 

few comments on the impact on the cost 

of business credit. While they took this 

time to express concerns that these 

regulations would increase their costs, 

they said these regulations would have 

little to no impact on the cost of 

business credit. When asked, one Small 

Entity Representative mentioned that at 

times people may use a home-secured 

loan to finance a business, which was 

corroborated by a different Small Entity 

Representative based on his personal 

experience with starting a business. 

In the IRFA, the Bureau asked 

interested parties to provide data and 

other factual information regarding the 

use of personal home-secured credit to 

finance a business. The Bureau received 

only one comment on this issue. The 

commenter stated that more than 52 

percent of the 27.9 million small 

businesses in the United States are 

home-based and close to 80 percent of 

small businesses file taxes as 

individuals. The commenter further 

stated that, according to the SBA, 73.2 

percent of small businesses in the 

United States are sole proprietors. Thus, 

in some instances, an increase in the 

cost of consumer credit is also an 

increase in the cost of business 

credit.217

Regarding the impact of the rule on 

the cost of consumer credit, the Bureau 

does not believe that the frequency or 

content of the new initial rate 

adjustment notice or the changes in the 

frequency and content of the 

§ 1026.20(c) disclosure create significant 

one-time costs or significant additional 

ongoing costs for servicers. The new 

initial rate adjustment disclosure is a 

one-time disclosure. The revised 

§ 1026.20(c) disclosure will be given 

less frequently than the disclosures 

required by in current § 1026.20(c), 

much of the content of the revised 

disclosure is provided in the current 

disclosure, and the Bureau has worked 

to mitigate the cost of the additional 

content in the revised disclosure. 

Certain one-time and ongoing costs will 

likely be absorbed by vendors, as 

discussed above. The periodic statement 

disclosure is given much more 

frequently and the additional costs may 

be significantly larger than the 

additional costs for other disclosures. 

However, the Bureau is mitigating the 

cost of this disclosure with the 

exemption for almost all small servicers, 

as described above. 

If vendors passed along all of the 

minimal costs associated with this rule 

to servicers, then the cost of servicing 

would rise by this amount. Servicers 

may attempt to collect this revenue by 

increasing penalties for missed 

payments or other charges outside of 

origination, in which case individuals 

who incur these charges may make 

much larger one-time payments than 

they do now. Over time, however, it is 

just as likely that servicers will seek to 

recover these costs at origination. All of 

the additional costs of servicing could 

be met by an origination fee or an 

increment to the cost of credit equal to 

the additional cost of servicing 

multiplied by the expected number of 

years the loan would be serviced. The 

Bureau believes that this cost would be 

minimal as well. 

The impact of an increase in the cost 

of mortgage loan servicing on other 

forms of consumer credit that may be 

used to fund a business, and on 

business credit itself, would be even 

smaller. If a lender has made optimal 

(profit maximizing) decisions in one 

line of business, a change in the costs 

of another line of business would not 

disrupt or alter the optimal decisions in 

the first line of business absent some 

shared inputs or platforms (‘‘economies 

of scope’’) or other important 

interdependencies that are not obvious 

in regards to consumer credit. This is 

especially clear if there is competition 

in the other line of business, in this case 

business credit lending, from firms that 

do not service mortgage loans and 

therefore did not experience a cost 

increase. Absent collusion, firms that 

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11002 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

218For purposes of this PRA analysis, the 

Bureau’s depository respondents under the 

proposed rule are 130 depository institutions and 

depository institution affiliates that service closedend consumer mortgages. The Bureau’s nondepository respondents are an estimated 1,388 nondepository servicers. Unless otherwise specified, all 

references to burden hours and costs for the Bureau 

respondents for the collection requirements under 

the proposed rule are based on a calculation of the 

burden from all of the Bureau’s depository 

respondents and half of the burden from the 

Bureau’s non-depository respondents. 

did not experience an increase in the 

costs have the ability and the incentive 

to underprice any firm that attempts to 

pass along a cost increase. 

In summary, the Bureau believes that 

the effect of the mortgage servicing rule 

on the cost of credit for small businesses 

is at most negligible. Furthermore, this 

cost is negligible whether the small 

business consumer is relying on a 

consumer mortgage loan, some other 

type of consumer credit, or a small 

business loan. 

IX. Paperwork Reduction Act 

The Bureau’s information collection 

requirements contained in this rule, and 

identified as such, were submitted to 

OMB for review under section 3507(d) 

of the Paperwork Reduction Act of 1995 

(44 U.S.C. 3501 et seq.) (Paperwork 

Reduction Act or PRA). 

Notwithstanding any other provision of 

the law, under the Paperwork Reduction 

Act, the Bureau may not conduct or 

sponsor, and a person is not required to 

respond to, an information collection 

unless the information collection 

displays a valid OMB control number. 

The OMB control number for this 

collection is 3170–0028. 

This rule amends 12 CFR part 1026 

(Regulation Z). Regulation Z currently 

contains collections of information 

approved by OMB, and the Bureau’s 

OMB control number for Regulation Z is 

3170–00015. The collection title is: 

Truth in Lending Act (Regulation Z) 12 

CFR 1026. 

On September 17, 2012, the proposed 

rule was published in the Federal 

Register (77 FR 57317). The Bureau 

invited comment on: (1) Whether the 

proposed collection of information is 

necessary for the proper performance of 

the Bureau’s functions, including 

whether the information has practical 

utility; (2) the accuracy of the Bureau’s 

estimate of the burden of the proposed 

information collection, including the 

cost of compliance; (3) ways to enhance 

the quality, utility, and clarity of the 

information to be collected; and (4) 

ways to minimize the burden of 

information collection on respondents, 

including through the use of automated 

collection techniques or other forms of 

information technology. The comment 

period for the burden analysis sections 

of the proposed rule expired on 

November 16, 2012. The Bureau did not 

receive any comments on the burden of 

the proposed information collection. 

However, the Bureau did receive 

comment on the more general 

consideration of certain costs in the 

proposed Dodd-Frank Act section 1022 

analysis, this comment is addressed in 

the final Dodd-Frank Act section 1022 

analysis above. 

The title of this information collection 

is Mortgage Servicing Amendment 

(Regulation Z). The frequency of 

response is on occasion. The 

information collection required 

provides benefits for consumers and is 

mandatory. See 15 U.S.C. 1601 et seq. 

Because the Bureau does not collect any 

information, no issue of confidentiality 

arises. The likely respondents would be 

federally-insured depository institutions 

(such as commercial banks, savings 

banks, and credit unions) and nondepository institutions that service 

consumer mortgage loans. 

Under the rule, the Bureau generally 

accounts for the paperwork burden 

associated with Regulation Z for the 

following respondents pursuant to its 

administrative enforcement authority: 

Insured depository institutions with 

more than $10 billion in total assets, 

their depository institution affiliates 

(together, the Bureau depository 

respondents), and certain nondepository servicers (the Bureau nondepository respondents). The Bureau 

and the Federal Trade Commission 

(FTC) generally both have enforcement 

authority over non-depository 

institutions under Regulation Z. 

Accordingly, the Bureau has allocated to 

itself half of the total estimated burden 

from non-depository respondents. Other 

Federal agencies, including the FTC, are 

responsible for estimating and reporting 

to OMB the total paperwork burden for 

the institutions for which they have 

administrative enforcement authority. 

They may, but are not required to, use 

the Bureau’s burden estimation 

methodology. 

Using the Bureau’s burden estimation 

methodology, the total estimated burden 

under the changes to Regulation Z for 

the roughly 12,643 institutions, 

including Bureau respondents,218 that 

are estimated to service consumer 

mortgages subject to the rule would be 

approximately 25,000 one-time burden 

hours and 65,000 ongoing burden hours 

per year. The aggregate estimates of total 

burdens presented in this part IX are 

based on estimates averaged across 

respondents. The Bureau expects that 

the amount of time required to 

implement each of the proposed 

changes for a given institution may vary 

based on the size, complexity, and 

practices of the respondent. 

A. Information Collection Requirements 

The Bureau is making four changes to 

the information collection requirements 

in Regulation Z. First, amended 

§ 1026.20(c) regarding adjustable-rate 

mortgages changes the format, content, 

and timing of the existing rate 

adjustment disclosures. The rule 

changes the minimum time for 

providing advance notice to consumers 

from 25 days to 60 days before the first 

payment at a new level is due when an 

interest rate adjustment causes a 

payment change. Servicers will be 

required to provide certain information 

that they may not currently disclose, but 

would no longer be required to notify 

consumers of a rate adjustment if the 

payment is unchanged. Second, as 

previously discussed, § 1026.20(d) 

regarding adjustable-rate mortgages 

requires creditors, assignees, or 

servicers to send a new initial rate 

adjustment disclosure at least 210, but 

not more than 240, days before the date 

the first payment is due after the initial 

rate adjustment. The new disclosure 

includes, among other things, 

information regarding the calculation of 

the new interest rate and information to 

assist consumers in the event the 

consumer requires alternative financing. 

Third, § 1026.36 makes changes to the 

existing requirements on servicers to 

promptly credit payments that satisfy 

payment rules specified by a servicer. 

Amended § 1026.36 also makes changes 

to the existing requirements to provide 

an accurate payoff balance upon 

request. This modifies the timeline on 

the existing information collection of 

the requirement to provide accurate 

payoff statements. 

Fourth, § 1026.41 requires a new 

periodic statement disclosure. The 

required content would include billing 

information, such as the amount due, 

payment due date, and information on 

any late fees; information on recent 

transaction activity and how payments 

were applied; general loan information, 

such as the interest rate and when it 

may next adjust, outstanding principal 

balance, etc.; and other information that 

may be helpful to troubled consumers. 

Certain small servicers (those servicing 

5,000 mortgages or less and who own or 

originated all the loans they are 

servicing) are exempt from this 

requirement. Fixed-rate mortgages are 

exempt if the servicer provides the 

consumer with a coupon book that 

contains certain information, and makes 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 11003 

219Based on discussions with industry 

participants, the Bureau assumes that all depository 

respondents except for one large entity and 95% of 

non-depository respondents (100% of small nondepository respondents) use third-party vendors for 

one-time software and IT capability and for ongoing 

production and distribution activities associated 

with disclosures. The Bureau believes at this time 

that under existing mortgage servicing contracts, 

vendors would absorb the one-time software and IT 

costs and ongoing production costs of disclosures 

for large- and medium-sized respondents but pass 

along these costs to small respondents. The Bureau 

will further consider the extent to which 

respondents use third-party vendors and the extent 

to which third-party vendors charge various costs 

to different types of respondents, and the Bureau 

seeks data and other factual information from 

interested parties on these issues. 

220 Dollar figures include estimated costs to 

vendors. 

other information available to the 

consumer. 

B. Burden Analysis Under the Four 

Information Collection Requirements 219

1. Changes in the Regulation Z 

§ 1026.20(c) Disclosure for AdjustableRate Mortgages 

All Bureau respondents will have a 

one-time burden under this requirement 

associated with reviewing the 

regulation. Certain Bureau respondents 

will have one-time burden from creating 

software and IT capability to provide 

the additional content in the disclosure. 

The Bureau estimates this one-time 

burden to be 165 hours for Bureau 

depository respondents and 1,050 hours 

and $58,000 for Bureau non-depository 

respondents.220

Regarding ongoing burden, the Bureau 

is requiring the disclosure only when 

the interest rate adjustment results in a 

corresponding change in the required 

payment. The Bureau believes it would 

be usual and customary to provide 

consumers with a disclosure under 

these circumstances. Thus, the Bureau 

believes there is no burden from 

distribution costs for purposes of PRA 

from the § 1026.20(c) disclosure. The 

Bureau recognizes that there is content 

in the disclosure beyond what may be 

usual and customary to provide. Bureau 

respondents that do not use vendors and 

certain small respondents that use 

vendors will incur production costs 

associated with this extra content, and 

this is considered a burden for purposes 

of PRA. The Bureau estimates the 

ongoing burden to be 1,250 hours for 

Bureau depository respondents and 180 

hours and $22,000 for Bureau nondepository respondents. 

2. New Initial Interest Rate Adjustment 

Notice for Adjustable-Rate Mortgages 

All Bureau respondents will have a 

one-time burden under this requirement 

associated with reviewing the 

regulation. Certain Bureau respondents 

will have a one-time burden from 

creating software and IT capability to 

produce the new disclosure. The Bureau 

estimates this one-time burden to be 140 

hours for Bureau depository 

respondents and 1,500 hours and 

$115,000 for Bureau non-depository 

respondents. 

Certain Bureau respondents will have 

ongoing burden associated with the IT 

used in producing the disclosure. All 

Bureau respondents will have ongoing 

costs associated with distributing (e.g., 

mailing) the disclosure. The Bureau 

estimates this ongoing burden to be 530 

hours and $57,000 for Bureau 

depository respondents and 80 hours 

and $5,600 for Bureau non-depository 

respondents. 

3. Prompt Crediting of Payments and 

Response to Requests for Payoff 

Amounts 

All Bureau respondents will have a 

one-time burden under this requirement 

associated with reviewing the 

regulation. The Bureau estimates this 

one-time burden to be 110 hours for 

Bureau depository respondents and 

1,375 hours for Bureau non-depository 

respondents. 

Regarding ongoing burden, the Bureau 

understands that the payoff statement 

requirement amends the timeline of a 

pre-existing disclosure that respondents 

are currently providing in the normal 

course of business. The Bureau does not 

believe that proposed changes to the 

content and timing of the existing 

disclosure will significantly change the 

ongoing production or distribution costs 

of the notice currently provided in the 

normal course of business. The Bureau 

estimates the ongoing burden to be 

1,650 hours and $178,000 for Bureau 

depository respondents and 250 hours 

and $17,000 for Bureau non-depository 

respondents. 

4. New Periodic Statements 

All Bureau respondents that are not 

exempt will have a one-time burden 

under this requirement associated with 

reviewing the regulation. Certain Bureau 

respondents will have a one-time 

burden from creating software and IT 

capability to modify existing periodic 

disclosures or produce a new 

disclosure. The disclosure incorporates 

the usual and customarily provided 

information in billing statements that 

many respondents already provide. 

However, the additional data fields and 

formatting requirements may not be 

usual and customary. The Bureau 

estimates this one-time burden to be 170 

hours for Bureau depository 

respondents and 800 hours for Bureau 

non-depository respondents. 

Regarding ongoing burden, consumers 

who currently receive a periodic 

statement or billing statement are 

receiving these disclosures in the 

normal course of business. The Bureau 

believes that most other consumers with 

mortgages receive a coupon book or 

other type of payment medium, such as 

a passbook. The statute provides that 

servicers do not have to provide the 

periodic statement disclosure to 

consumers who have both a fixed-rate 

mortgage and a coupon book. Thus, the 

only consumers who are not already 

receiving a billing statement or periodic 

disclosure to whom servicers will have 

to begin providing the periodic 

statement disclosure under the 

proposed rule are those with both an 

adjustable-rate mortgage and a coupon 

book. The burden of distributing the 

periodic statement disclosure to these 

consumers is, for purposes of PRA, the 

ongoing burden from distribution costs 

from the proposed periodic statement 

disclosure. The Bureau recognizes that 

there is content in the periodic 

statement disclosure beyond what may 

be usual and customary to provide in 

existing billing statements. The Bureau 

estimates the ongoing burden to be 

47,000 hours and $5,065,000 for Bureau 

depository respondents and 4,600 hours 

and $330,000 for Bureau non-depository 

respondents. 

C. Summary of Burden Hours for 

Bureau Respondents 

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11004 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

Between the proposed and final rule 

the Bureau improved its methodology 

for estimating the average unpaid 

principal balance of outstanding 

mortgages. In addition, the Bureau 

updated the institution counts from 

2010 year-end to 2011 year-end figures. 

List of Subjects in 12 CFR Part 1026 

Advertising, Consumer protection, 

Credit, Credit unions, Mortgages, 

National banks, Reporting and 

recordkeeping requirements, Savings 

associations, Truth in lending. 

Authority and Issuance 

For the reasons set forth above, the 

Bureau amends Regulation Z, 12 CFR 

part 1026, as set forth below: 

PART 1026—TRUTH IN LENDING 

(REGULATION Z) 

■ 1. The authority citation for part 1026 

continues to read as follows: 

Authority: 12 U.S.C. 2601; 2603–2605, 

2607, 2609, 2617, 5511, 5512, 5532, 5581; 15 

U.S.C. 1601 et seq. 

Subpart C—Closed-End Credit 

■ 2. Section 1026.17 is amended by 

revising paragraphs (a)(1) and (b) to read 

as follows: 

§ 1026.17 General disclosure 

requirements. 

(a) Form of disclosures. (1) The 

creditor shall make the disclosures 

required by this subpart clearly and 

conspicuously in writing, in a form that 

the consumer may keep. The disclosures 

required by this subpart may be 

provided to the consumer in electronic 

form, subject to compliance with the 

consumer consent and other applicable 

provisions of the Electronic Signatures 

in Global and National Commerce Act 

(E-Sign Act) (15 U.S.C. 7001 et seq.). 

The disclosures required by 

§§ 1026.17(g), 1026.19(b), and 1026.24 

may be provided to the consumer in 

electronic form without regard to the 

consumer consent or other provisions of 

the E-Sign Act in the circumstances set 

forth in those sections. The disclosures 

shall be grouped together, shall be 

segregated from everything else, and 

shall not contain any information not 

directly related to the disclosures 

required under § 1026.18, § 1026.20(c) 

and (d), or § 1026.47. The disclosures 

required by § 1026.20(d) shall be 

provided as a separate document from 

all other written materials. The 

disclosures may include an 

acknowledgment of receipt, the date of 

the transaction, and the consumer’s 

name, address, and account number. 

The following disclosures may be made 

together with or separately from other 

required disclosures: The creditor’s 

identity under § 1026.18(a), the variable 

rate example under § 1026.18(f)(1)(iv), 

insurance or debt cancellation under 

§ 1026.18(n), and certain security 

interest charges under § 1026.18(o). The 

itemization of the amount financed 

under § 1026.18(c)(1) must be separate 

from the other disclosures under 

§ 1026.18, except for private education 

loan disclosures made in compliance 

with § 1026.47. 

* * * * * 

(b) Time of disclosures. The creditor 

shall make disclosures before 

consummation of the transaction. In 

certain residential mortgage 

transactions, special timing 

requirements are set forth in 

§ 1026.19(a). In certain variable-rate 

transactions, special timing 

requirements for variable-rate 

disclosures are set forth in § 1026.19(b) 

and § 1026.20(c) and (d). For private 

education loan disclosures made in 

compliance with § 1026.47, special 

timing requirements are set forth in 

§ 1026.46(d). In certain transactions 

involving mail or telephone orders or a 

series of sales, the timing of disclosures 

may be delayed in accordance with 

paragraphs (g) and (h) of this section. 

* * * * * 

■ 3. Section 1026.20 is amended by 

revising the heading and paragraphs (c) 

and (d) to read as follows: 

§ 1026.20 Disclosure requirements 

regarding post-consummation events. 

* * * * * 

(c) Rate adjustments with a 

corresponding change in payment. The 

creditor, assignee, or servicer of an 

adjustable-rate mortgage shall provide 

consumers with disclosures, as 

described in this paragraph (c), in 

connection with the adjustment of 

interest rates pursuant to the loan 

contract that results in a corresponding 

adjustment to the payment. To the 

extent that other provisions of this 

subpart C govern the disclosures 

required by this paragraph (c), those 

provisions apply to assignees and 

servicers as well as to creditors. The 

disclosures required by this paragraph 

(c) also shall be provided for an interest 

rate adjustment resulting from the 

conversion of an adjustable-rate 

mortgage to a fixed-rate transaction, if 

that interest rate adjustment results in a 

corresponding payment change. 

(1) Coverage. (i) In general. For 

purposes of this paragraph (c), an 

adjustable-rate mortgage or ‘‘ARM’’ is a 

closed-end consumer credit transaction 

secured by the consumer’s principal 

dwelling in which the annual 

percentage rate may increase after 

consummation. 

(ii) Exemptions. The requirements of 

this paragraph (c) do not apply to: 

(A) ARMs with terms of one year or 

less; or 


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(B) The first interest rate adjustment 

to an ARM if the first payment at the 

adjusted level is due within 210 days 

after consummation and the new 

interest rate disclosed at consummation 

pursuant to § 1026.20(d) was not an 

estimate. 

(2) Timing and content. Except as 

otherwise provided in paragraph (c)(2) 

of this section, the disclosures required 

by this paragraph (c) shall be provided 

to consumers at least 60, but no more 

than 120, days before the first payment 

at the adjusted level is due. The 

disclosures shall be provided to 

consumers at least 25, but no more than 

120, days before the first payment at the 

adjusted level is due for ARMs with 

uniformly scheduled interest rate 

adjustments occurring every 60 days or 

more frequently and for ARMs 

originated prior to January 10, 2015 in 

which the loan contract requires the 

adjusted interest rate and payment to be 

calculated based on the index figure 

available as of a date that is less than 45 

days prior to the adjustment date. The 

disclosures shall be provided to 

consumers as soon as practicable, but 

not less than 25 days before the first 

payment at the adjusted level is due, for 

the first adjustment to an ARM if it 

occurs within 60 days of consummation 

and the new interest rate disclosed at 

consummation pursuant to § 1026.20(d) 

was an estimate. The disclosures 

required by this paragraph (c) shall 

include: 

(i) A statement providing: 

(A) An explanation that under the 

terms of the consumer’s adjustable-rate 

mortgage, the specific time period in 

which the current interest rate has been 

in effect is ending and the interest rate 

and mortgage payment will change; 

(B) The effective date of the interest 

rate adjustment and when additional 

future interest rate adjustments are 

scheduled to occur; and 

(C) Any other changes to loan terms, 

features, or options taking effect on the 

same date as the interest rate 

adjustment, such as the expiration of 

interest-only or payment-option 

features. 

(ii) A table containing the following 

information: 

(A) The current and new interest 

rates; 

(B) The current and new payments 

and the date the first new payment is 

due; and 

(C) For interest-only or negativelyamortizing payments, the amount of the 

current and new payment allocated to 

principal, interest, and taxes and 

insurance in escrow, as applicable. The 

current payment allocation disclosed 

shall be the payment allocation for the 

last payment prior to the date of the 

disclosure. The new payment allocation 

disclosed shall be the expected payment 

allocation for the first payment for 

which the new interest rate will apply. 

(iii) An explanation of how the 

interest rate is determined, including: 

(A) The specific index or formula 

used in making interest rate adjustments 

and a source of information about the 

index or formula; and 

(B) The type and amount of any 

adjustment to the index, including any 

margin and an explanation that the 

margin is the addition of a certain 

number of percentage points to the 

index, and any application of previously 

foregone interest rate increases from 

past interest rate adjustments. 

(iv) Any limits on the interest rate or 

payment increases at each interest rate 

adjustment and over the life of the loan, 

as applicable, including the extent to 

which such limits result in the creditor, 

assignee, or servicer foregoing any 

increase in the interest rate and the 

earliest date that such foregone interest 

rate increases may apply to future 

interest rate adjustments, subject to 

those limits. 

(v) An explanation of how the new 

payment is determined, including: 

(A) The index or formula used; 

(B) Any adjustment to the index or 

formula, such as the addition of a 

margin or the application of any 

previously foregone interest rate 

increases from past interest rate 

adjustments; 

(C) The loan balance expected on the 

date of the interest rate adjustment; and 

(D) The length of the remaining loan 

term expected on the date of the interest 

rate adjustment and any change in the 

term of the loan caused by the 

adjustment. 

(vi) If applicable, a statement that the 

new payment will not be allocated to 

pay loan principal and will not reduce 

the loan balance. If the new payment 

will result in negative amortization, a 

statement that the new payment will not 

be allocated to pay loan principal and 

will pay only part of the loan interest, 

thereby adding to the balance of the 

loan. If the new payment will result in 

negative amortization as a result of the 

interest rate adjustment, the statement 

shall set forth the payment required to 

amortize fully the remaining balance at 

the new interest rate over the remainder 

of the loan term. 

(vii) The circumstances under which 

any prepayment penalty, as defined in 

§ 1026.32(b)(6)(i), may be imposed, such 

as when paying the loan in full or 

selling or refinancing the principal 

dwelling; the time period during which 

such a penalty may be imposed; and a 

statement that the consumer may 

contact the servicer for additional 

information, including the maximum 

amount of the penalty. 

(3) Format. (i) The disclosures 

required by this paragraph (c) shall be 

provided in the form of a table and in 

the same order as, and with headings 

and format substantially similar to, 

forms H–4(D)(1) and (2) in appendix H 

to this part; and 

(ii) The disclosures required by 

paragraph (c)(2)(ii) of this section shall 

be in the form of a table located within 

the table described in paragraph (c)(3)(i) 

of this section. These disclosures shall 

appear in the same order as, and with 

headings and format substantially 

similar to, the table inside the larger 

table in forms H–4(D)(1) and (2) in 

appendix H to this part. 

(d) Initial rate adjustment. The 

creditor, assignee, or servicer of an 

adjustable-rate mortgage shall provide 

consumers with disclosures, as 

described in this paragraph (d), in 

connection with the initial interest rate 

adjustment pursuant to the loan 

contract. To the extent that other 

provisions of this subpart C govern the 

disclosures required by this paragraph 

(d), those provisions apply to assignees 

and servicers as well as to creditors. The 

disclosures required by this paragraph 

(d) shall be provided as a separate 

document from other documents 

provided by the creditor, assignee, or 

servicer. The disclosures shall be 

provided to consumers at least 210, but 

no more than 240, days before the first 

payment at the adjusted level is due. If 

the first payment at the adjusted level is 

due within the first 210 days after 

consummation, the disclosures shall be 

provided at consummation. 

(1) Coverage. (i) In general. For 

purposes of this paragraph (d), an 

adjustable-rate mortgage or ‘‘ARM’’ is a 

closed-end consumer credit transaction 

secured by the consumer’s principal 

dwelling in which the annual 

percentage rate may increase after 

consummation. 

(ii) Exemptions. The requirements of 

this paragraph (d) do not apply to ARMs 

with terms of one year or less. 

(2) Content. If the new interest rate (or 

the new payment calculated from the 

new interest rate) is not known as of the 

date of the disclosure, an estimate shall 

be disclosed and labeled as such. This 

estimate shall be based on the 

calculation of the index reported in the 

source of information described in 

paragraph (d)(2)(iv)(A) of this section 

within fifteen business days prior to the 

date of the disclosure. The disclosures 

required by this paragraph (d) shall 

include: 

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(i) The date of the disclosure. 

(ii) A statement providing: 

(A) An explanation that under the 

terms of the consumer’s adjustable-rate 

mortgage, the specific time period in 

which the current interest rate has been 

in effect is ending and that any change 

in the interest rate may result in a 

change in the mortgage payment; 

(B) The effective date of the interest 

rate adjustment and when additional 

future interest rate adjustments are 

scheduled to occur; and 

(C) Any other changes to loan terms, 

features, or options taking effect on the 

same date as the interest rate 

adjustment, such as the expiration of 

interest-only or payment-option 

features. 

(iii) A table containing the following 

information: 

(A) The current and new interest 

rates; 

(B) The current and new payments 

and the date the first new payment is 

due; and 

(C) For interest-only or negativelyamortizing payments, the amount of the 

current and new payment allocated to 

principal, interest, and taxes and 

insurance in escrow, as applicable. The 

current payment allocation disclosed 

shall be the payment allocation for the 

last payment prior to the date of the 

disclosure. The new payment allocation 

disclosed shall be the expected payment 

allocation for the first payment for 

which the new interest rate will apply. 

(iv) An explanation of how the 

interest rate is determined, including: 

(A) The specific index or formula 

used in making interest rate adjustments 

and a source of information about the 

index or formula; and 

(B) The type and amount of any 

adjustment to the index, including any 

margin and an explanation that the 

margin is the addition of a certain 

number of percentage points to the 

index. 

(v) Any limits on the interest rate or 

payment increases at each interest rate 

adjustment and over the life of the loan, 

as applicable, including the extent to 

which such limits result in the creditor, 

assignee, or servicer foregoing any 

increase in the interest rate and the 

earliest date that such foregone interest 

rate increases may apply to future 

interest rate adjustments, subject to 

those limits. 

(vi) An explanation of how the new 

payment is determined, including: 

(A) The index or formula used; 

(B) Any adjustment to the index or 

formula, such as the addition of a 

margin; 

(C) The loan balance expected on the 

date of the interest rate adjustment; 

(D) The length of the remaining loan 

term expected on the date of the interest 

rate adjustment and any change in the 

term of the loan caused by the 

adjustment; and 

(E) If the new interest rate or new 

payment provided is an estimate, a 

statement that another disclosure 

containing the actual new interest rate 

and new payment will be provided to 

the consumer between two and four 

months before the first payment at the 

adjusted level is due for interest rate 

adjustments that result in a 

corresponding payment change. 

(vii) If applicable, a statement that the 

new payment will not be allocated to 

pay loan principal and will not reduce 

the loan balance. If the new payment 

will result in negative amortization, a 

statement that the new payment will not 

be allocated to pay loan principal and 

will pay only part of the loan interest, 

thereby adding to the balance of the 

loan. If the new payment will result in 

negative amortization as a result of the 

interest rate adjustment, the statement 

shall set forth the payment required to 

amortize fully the remaining balance at 

the new interest rate over the remainder 

of the loan term. 

(viii) The circumstances under which 

any prepayment penalty, as defined in 

§ 1026.32(b)(6)(i), may be imposed, such 

as when paying the loan in full or 

selling or refinancing the principal 

dwelling; the time period during which 

such a penalty may be imposed; and a 

statement that the consumer may 

contact the servicer for additional 

information, including the maximum 

amount of the penalty. 

(ix) The telephone number of the 

creditor, assignee, or servicer for 

consumers to call if they anticipate not 

being able to make their new payments. 

(x) The following alternatives to 

paying at the new rate that consumers 

may be able to pursue and a brief 

explanation of each alternative, 

expressed in simple and clear terms: 

(A) Refinancing the loan with the 

current or another creditor or assignee; 

(B) Selling the property and using the 

proceeds to pay the loan in full; 

(C) Modifying the terms of the loan 

with the creditor, assignee, or servicer; 

and 

(D) Arranging payment forbearance 

with the creditor, assignee, or servicer. 

(xi) The Web site to access either the 

Bureau list or the HUD list of 

homeownership counselors and 

counseling organizations, the HUD tollfree telephone number to access the 

HUD list of homeownership counselors 

and counseling organizations, and the 

Bureau Web site to access contact 

information for State housing finance 

authorities (as defined in § 1301 of the 

Financial Institutions Reform, Recovery, 

and Enforcement Act of 1989). 

(3) Format. (i) Except for the 

disclosures required by paragraph 

(d)(2)(i) of this section, the disclosures 

required by this paragraph (d) shall be 

provided in the form of a table and in 

the same order as, and with headings 

and format substantially similar to, 

forms H–4(D)(3) and (4) in appendix H 

to this part; 

(ii) The disclosures required by 

paragraph (d)(2)(i) of this section shall 

appear outside of and above the table 

required in paragraph (d)(3)(i) of this 

section; and 

(iii) The disclosures required by 

paragraph (d)(2)(iii) of this section shall 

be in the form of a table located within 

the table described in paragraph (d)(3)(i) 

of this section. These disclosures shall 

appear in the same order as, and with 

headings and format substantially 

similar to, the table inside the larger 

table in forms H–4(D)(3) and (4) in 

appendix H to this part. 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

■ 4. Section 1026.36 is amended by 

revising paragraph (c) to read as follows: 

§ 1026.36 Prohibited acts or practices in 

connection with credit secured by a 

dwelling. 

* * * * * 

(c) Servicing practices. For purposes 

of this paragraph (c), the terms 

‘‘servicer’’ and ‘‘servicing’’ have the 

same meanings as provided in 12 CFR 

1024.2(b). 

(1) Payment processing. In connection 

with a consumer credit transaction 

secured by a consumer’s principal 

dwelling: 

(i) Periodic payments. No servicer 

shall fail to credit a periodic payment to 

the consumer’s loan account as of the 

date of receipt, except when a delay in 

crediting does not result in any charge 

to the consumer or in the reporting of 

negative information to a consumer 

reporting agency, or except as provided 

in paragraph (c)(1)(iii) of this section. A 

periodic payment, as used in this 

paragraph (c), is an amount sufficient to 

cover principal, interest, and escrow (if 

applicable) for a given billing cycle. A 

payment qualifies as a periodic payment 

even if it does not include amounts 

required to cover late fees, other fees, or 

non-escrow payments a servicer has 

advanced on a consumer’s behalf. 

(ii) Partial payments. Any servicer 

that retains a partial payment, meaning 

any payment less than a periodic 

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payment, in a suspense or unapplied 

funds account shall: 

(A) Disclose to the consumer the total 

amount of funds held in such suspense 

or unapplied funds account on the 

periodic statement as required by 

§ 1026.41(d)(3), if a periodic statement 

is required; and 

(B) On accumulation of sufficient 

funds to cover a periodic payment in 

any suspense or unapplied funds 

account, treat such funds as a periodic 

payment received in accordance with 

paragraph (c)(1)(i) of this section. 

(iii) Non-conforming payments. If a 

servicer specifies in writing 

requirements for the consumer to follow 

in making payments, but accepts a 

payment that does not conform to the 

requirements, the servicer shall credit 

the payment as of five days after receipt. 

(2) No pyramiding of late fees. In 

connection with a consumer credit 

transaction secured by a consumer’s 

principal dwelling, a servicer shall not 

impose any late fee or delinquency 

charge for a payment if: 

(i) Such a fee or charge is attributable 

solely to failure of the consumer to pay 

a late fee or delinquency charge on an 

earlier payment; and 

(ii) The payment is otherwise a 

periodic payment received on the due 

date, or within any applicable courtesy 

period. 

(3) Payoff statements. In connection 

with a consumer credit transaction 

secured by a consumer’s dwelling, a 

creditor, assignee or servicer, as 

applicable, must provide an accurate 

statement of the total outstanding 

balance that would be required to pay 

the consumer’s obligation in full as of a 

specified date. The statement shall be 

sent within a reasonable time, but in no 

case more than seven business days, 

after receiving a written request from 

the consumer or any person acting on 

behalf of the consumer. When a 

creditor, assignee, or servicer, as 

applicable, is not able to provide the 

statement within seven business days of 

such a request because a loan is in 

bankruptcy or foreclosure, because the 

loan is a reverse mortgage or shared 

appreciation mortgage, or because of 

natural disasters or other similar 

circumstances, the payoff statement 

must be provided within a reasonable 

time. A creditor or assignee that does 

not currently own the mortgage loan or 

the mortgage servicing rights is not 

subject to the requirement in this 

paragraph (c)(3) to provide a payoff 

statement. 

* * * * * 

■ 5. Section 1026.41 is added to read as 

follows: 

§ 1026.41 Periodic statements for 

residential mortgage loans. 

(a) In general. (1) Scope. This section 

applies to a closed-end consumer credit 

transaction secured by a dwelling, 

unless an exemption in paragraph (e) of 

this section applies. Such transactions 

are referred to as mortgage loans for the 

purposes of this section. 

(2) Periodic statements. A servicer of 

a transaction subject to this section shall 

provide the consumer, for each billing 

cycle, a periodic statement meeting the 

requirements of paragraphs (b), (c), and 

(d) of this section. If a mortgage loan has 

a billing cycle shorter than a period of 

31 days (for example, a bi-weekly billing 

cycle), a periodic statement covering an 

entire month may be used. For the 

purposes of this section, servicer 

includes the creditor, assignee, or 

servicer, as applicable. A creditor or 

assignee that does not currently own the 

mortgage loan or the mortgage servicing 

rights is not subject to the requirement 

in this section to provide a periodic 

statement. 

(b) Timing of the periodic statement. 

The periodic statement must be 

delivered or placed in the mail within 

a reasonably prompt time after the 

payment due date or the end of any 

courtesy period provided for the 

previous billing cycle. 

(c) Form of the periodic statement. 

The servicer must make the disclosures 

required by this section clearly and 

conspicuously in writing, or 

electronically if the consumer agrees, 

and in a form that the consumer may 

keep. Sample forms for periodic 

statements are provided in appendix H– 

30. Proper use of these forms complies 

with the requirements of this paragraph 

(c) and the layout requirements in 

paragraph (d) of this section. 

(d) Content and layout of the periodic 

statement. The periodic statement 

required by this section shall include: 

(1) Amount due. Grouped together in 

close proximity to each other and 

located at the top of the first page of the 

statement: 

(i) The payment due date; 

(ii) The amount of any late payment 

fee, and the date on which that fee will 

be imposed if payment has not been 

received; and 

(iii) The amount due, shown more 

prominently than other disclosures on 

the page and, if the transaction has 

multiple payment options, the amount 

due under each of the payment options. 

(2) Explanation of amount due. The 

following items, grouped together in 

close proximity to each other and 

located on the first page of the 

statement: 

(i) The monthly payment amount, 

including a breakdown showing how 

much, if any, will be applied to 

principal, interest, and escrow and, if a 

mortgage loan has multiple payment 

options, a breakdown of each of the 

payment options along with information 

on whether the principal balance will 

increase, decrease, or stay the same for 

each option listed; 

(ii) The total sum of any fees or 

charges imposed since the last 

statement; and 

(iii) Any payment amount past due. 

(3) Past Payment Breakdown. The 

following items, grouped together in 

close proximity to each other and 

located on the first page of the 

statement: 

(i) The total of all payments received 

since the last statement, including a 

breakdown showing the amount, if any, 

that was applied to principal, interest, 

escrow, fees and charges, and the 

amount, if any, sent to any suspense or 

unapplied funds account; and 

(ii) The total of all payments received 

since the beginning of the current 

calendar year, including a breakdown of 

that total showing the amount, if any, 

that was applied to principal, interest, 

escrow, fees and charges, and the 

amount, if any, currently held in any 

suspense or unapplied funds account. 

(4) Transaction activity. A list of all 

the transaction activity that occurred 

since the last statement. For purposes of 

this paragraph (d)(4), transaction 

activity means any activity that causes 

a credit or debit to the amount currently 

due. This list must include the date of 

the transaction, a brief description of the 

transaction, and the amount of the 

transaction for each activity on the list. 

(5) Partial payment information. If a 

statement reflects a partial payment that 

was placed in a suspense or unapplied 

funds account, information explaining 

what must be done for the funds to be 

applied. The information must be on the 

front page of the statement or, 

alternatively, may be included on a 

separate page enclosed with the 

periodic statement or in a separate 

letter. 

(6) Contact information. A toll-free 

telephone number and, if applicable, an 

electronic mailing address that may be 

used by the consumer to obtain 

information about the consumer’s 

account, located on the front page of the 

statement. 

(7) Account information. The 

following information: 

(i) The amount of the outstanding 

principal balance; 

(ii) The current interest rate in effect 

for the mortgage loan; 

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(iii) The date after which the interest 

rate may next change; 

(iv) The existence of any prepayment 

penalty, as defined in § 1026.32(b)(6)(i), 

that may be charged; 

(v) The Web site to access either the 

Bureau list or the HUD list of 

homeownership counselors and 

counseling organizations and the HUD 

toll-free telephone number to access 

contact information for homeownership 

counselors or counseling organizations; 

and 

(8) Delinquency information. If the 

consumer is more than 45 days 

delinquent, the following items, 

grouped together in close proximity to 

each other and located on the first page 

of the statement or, alternatively, on a 

separate page enclosed with the 

periodic statement or in a separate 

letter: 

(i) The date on which the consumer 

became delinquent; 

(ii) A notification of possible risks, 

such as foreclosure, and expenses, that 

may be incurred if the delinquency is 

not cured; 

(iii) An account history showing, for 

the previous six months or the period 

since the last time the account was 

current, whichever is shorter, the 

amount remaining past due from each 

billing cycle or, if any such payment 

was fully paid, the date on which it was 

credited as fully paid; 

(iv) A notice indicating any loss 

mitigation program to which the 

consumer has agreed, if applicable; 

(v) A notice of whether the servicer 

has made the first notice or filing 

required by applicable law for any 

judicial or non-judicial foreclosure 

process, if applicable; 

(vi) The total payment amount needed 

to bring the account current; and 

(vii) A reference to the 

homeownership counselor information 

disclosed pursuant to paragraph 

(d)(7)(v) of this section. 

(e) Exemptions. (1) Reverse mortgages. 

Reverse mortgage transactions, as 

defined by § 1026.33(a), are exempt 

from the requirements of this section. 

(2) Timeshare plans. Transactions 

secured by consumers’ interests in 

timeshare plans, as defined by 11 U.S.C. 

101(53D), are exempt from the 

requirements of this section. 

(3) Coupon books. The requirements 

of paragraph (a) of this section do not 

apply to fixed-rate loans if the servicer: 

(i) Provides the consumer with a 

coupon book that includes on each 

coupon the information listed in 

paragraph (d)(1) of this section; 

(ii) Provides the consumer with a 

coupon book that includes anywhere in 

the coupon book: 

(A) The account information listed in 

paragraph (d)(7) of this section; 

(B) The contact information for the 

servicer, listed in paragraph (d)(6) of 

this section; and 

(C) Information on how the consumer 

can obtain the information listed in 

paragraph (e)(3)(iii) of this section; 

(iii) Makes available upon request to 

the consumer by telephone, in writing, 

in person, or electronically, if the 

consumer consents, the information 

listed in paragraph (d)(2) through (5) of 

this section; and 

(iv) Provides the consumer the 

information listed in paragraph (d)(8) of 

this section in writing, for any billing 

cycle during which the consumer is 

more than 45 days delinquent. 

(4) Small servicers. (i) Exemption. A 

creditor, assignee, or servicer is exempt 

from the requirements of this section for 

mortgage loans serviced by a small 

servicer. 

(ii) Small servicer defined. A small 

servicer is a servicer that either: 

(A) Services 5,000 or fewer mortgage 

loans, for all of which the servicer (or 

an affiliate) is the creditor or assignee; 

or 

(B) Is a Housing Finance Agency, as 

defined in 24 CFR 266.5. 

(iii) Small servicer determination. In 

determining whether a small servicer 

services 5,000 or fewer mortgage loans, 

a servicer is evaluated based on the 

number of mortgage loans serviced by 

the servicer and any affiliates as of 

January 1 for the remainder of the 

calendar year. A servicer that crosses 

the threshold will have six months after 

crossing the threshold or until the next 

January 1, whichever is later, to comply 

with any requirements for which a 

servicer is no longer exempt as a small 

servicer. 

■ 6. Appendix H to Part 1026 is 

amended by: 

■ A. Removing the entry for H–4(D) and 

adding entries in alphanumerical order 

for H–4(D)(1) through H–4(D)(4), and 

H–30(A), through H–30(D), in the table 

of contents at the beginning of the 

appendix; 

■ B. Republishing the note to H–4(C); 

■ C. Removing H–4(D); 

■ D. Adding model and sample forms 

H–4(D)(1) through H–4(D)(4), and 

H–30(A) through H–30(C), and sample 

clause H–30(D), in alphanumerical 

order; and 

■ E. Republishing H–4(E) and H–4(F). 

The additions and republications read 

as follows: 

Appendix H to Part 1026—Closed-End 

Model Forms and Clauses 

* * * * * 

H–4(D)(1) Adjustable-Rate Mortgage Model 

Form (§ 1026.20(c)) 

H–4(D)(2) Adjustable-Rate Mortgage Sample 

Form (§ 1026.20(c)) 

H–4(D)(3) Adjustable-Rate Mortgage Model 

Form (§ 1026.20(d)) 

H–4(D)(4) Adjustable-Rate Mortgage Sample 

Form (§ 1026.20(d)) 

* * * * * 

H–30(A) Sample Form of Periodic Statement 

(§ 1026.41) 

H–30(B) Sample Form of Periodic Statement 

with Delinquency Box (§ 1026.41) 

H–30(C) Sample Form of Periodic Statement 

for a Payment-Options Loan (§ 1026.41) 

H–30(D) Sample Clause for Homeownership 

Counselor Contact Information (§ 1026.41) 

* * * * * 

BILLING CODE 4810–AM–P 


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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 11009 


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H-4(D)(1) Model Form for § l026.20(c) 

Changes to Your Mortgage Interest Rate and Payments on (date) 

Und.et theteml$ Qfyour :Adjusta"le·RateM~ltgag~ (ARI\II), you had a (duration) period duringWhkhyour 

interest rate stayed the.same. That period ends on (date),soonthatctate your interest. rate and mortgage 

payment change. After that, your interest rate may change (Jrequency) for the rest Of your loan term. (Also, as 

()f {dttte} {cht:mgesto{ocmtertilsdetttures aroptiOlli}.] 

Total (/requ.ency) Payment $_-

Interest Rate: We calculated your interest rate by taking a published "ihdex rate"andaddinga certain number of 

percentage points, called the <{margin." LInder your loan agreement, VOUI' index rate is (index) and youfmargin is 

_%. TheIindex) is published (frequef!CY) in (sourceoflnfoirr'ratJon). [Description andal110urit of()ther 

adjllstment{s)fo tilej"hdex]. 

(Rate LirnitfsJ: (Yourrate cannot go higher than _%overthe life of the loan,lTYourrate: can change eachyearby 

no more than _ . .'Yo.j[We dig not include an adrlitional_% il")terest rate increasetoybOr new rate because a. 

rate limit applied. This adcHtionalincrease may qe applied to your interest rate when it adjosts.again on{daie).]] 

New Interest Rate and lVlonthly Payment: The table abovE!'showsyout new interestrateand new monthly 

paymetlt. Yournewpayment.is based on t.he.{inl:Jex), voprmargrti, [deScriptiQn b[Gtheradjustment(s} to the 

index,lyour loan balance. of$ ----,--,-,---,and your rema ining loan term·6f_ months, 

[lnterest"Only Payments: Your newpaymentwill not cover any principal. Therefore,making this paymentwiH not 

reduce your loan balance.] 

[Wamingabolit Increase in Your Loan Balance: Your new payment covers only part of the intere.st and no 

principal. Therefore, the unpaid interestwill add to tnebalanceoftheloan; [In order tofally payoffyour.loan by 

the end of the lOan termanhenewint¢restrate~vouwbuld h/iveto pay$ __ permpnth:]] 

[PrepaymentPena!ty: [Nonel [Keep inmind that (f you pay off your IQan, refinance or sell your home before 

(date), you could be charged a penalty. Contact (mortgage company) at (telephone number) [or (emaitaddress)] 

for more information, such as the maximllm amount of the penalty you could be th!Hged.]) 
11010 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 


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H-4(D)(2) Sample Form for § 1026.20(c) 

luty20,2012 

Jordan and Dam Smi1b 

4700 Jones Drillle 

Memphis, TN :38109 

Springside Mortgage 

l234 .Miiin 5t 

Memphis, TN 31801 

Changes to Your Mortgage Interest Rate and Payments on September 1,1011 

(Jnda-tIIe temlSofyour AdjustaIR-Bate Mmtgage fARMJ.ycrulBd II ~ psiod. ~ IIIIhidt your. 

inten5trate stayed tile SiIIIle. 111M pedod ends m SeptemlJerl. 2012. SO: m tim date your inten5t nd:e and 

hICII1gage~.dJiqe. After 1Ita1;. your inten5t Ate mayd1imge ilIIIIIIdy _tile rest oIyaur IoaR temt. 

Interest Rate: We calcUlated ljOIJr interesuate by taJQng a pubtished"index rate" and ailking a certain number of' 

pen:entilge points, called the "'margin:" U!fII:IN ljOIJr loan agreement,ljOIJr index rate is the 1-year UBOR. andljOlJr 

margin is 225%. The UBOR indeJ: is p!JbIIi$hed daily fin the Wall Street Jwmat 

Ratelimits: 'four rate cannot go higher '!him 11.625% over the iIeof the Joan.. Your rate can change earn ¥3If by 

no more than 2JJBi. 

Rewlnterest Rate and MOItINv Payment: The table abt:ne shIJws·ljOIJr new interest rate and new mon1ihJy 

payment. Your new payment is basedon the UROI. index,.ljOIJr margin..ljOIJr loan balanceof' $1891"140, and ljOIJr 

remaining loan term of 324 months. 

Pn!pmnent Penalty: (eep in mind that if ¥OO payolfljOlJr 10m. refimnce or seflljOlJr home before September 1. 

.2012. ¥OO .coUld be chaTged a penalty. Contact Spring:side Mortgage at (SOO) 165-4321 for more informatiOn. sudh 

as the maximum amount of the penalty ¥OO .coUld be charged.. 
Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 11011 


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H-4(D)(3) Model Form for § 1026.20(d) 

C flanges to Your iVlortg<lge Int(;'r,,~t fi"t(;' "nd P"yrnents on (date) 

UndOl'WtOl'IIiSofyoar AllJUsbib .... Rmt MortppCARM', you had a (dJlifltfottJ ..-.. od durllll whleh your 

i .. rest .... stay.t W .. _ lhIItpllrW ...... on ('*'.',80 on that date your ImaNlt rate maychanp. After 

that, your interest rate 11'1., dvInp (lMrutmYJfonha rest otyour loan term. Any eha ... In your Interest nlte 

1IIIY4IIso ch •• yaur 11'10 ....... payment. [Also. a. of (d§tftJ(cfuIrtge(.lto INn .""",lnw"',oroptlon'/~ 

InWl!St fI ..... We oalculated your Intere5t:rate by taking II published "'ndel( rateR and adding a certllin number of 

percentage points, ailled the "margin." Under your loan lillfeement. your [ndel<' rate is (Index) and your margin is 

_~; l'he.(fm:l'exJ Is published (/'refluwcy) In (so~ offrij'ormt.ftiotl). [Dfid1ptf<m and a{rif;ui'lto/ other 

adjustment(s} to the illdex.] 

(lIMp UmlIs1: [younate cannot go higher than --,~over the life of the loan.] [Your rail! can change each year by 

no mOr'e than _%.] [We did not Include an addltlonal_" interest fate (ncrell" to your new rate, because a 

rate Ifmitapplled. This "ddilfonal increase rtl<Iybeapplied to your interest rate when iUdjuSIlI apt" on {dm}.]] 

Ntw'!!I.!rest Rate and Mghly Payment; The table aboveshow$ [our ~¢fl your new interest rate and 

new monthly payment. These amounts are based on thelfn(Jeltj Hof!'lOW, yoyr margin, [de$Cl'lptionO! ¢lIltir 

adjustment(s} to the illdex,] your loan balance ofS---, arid your remaining loon term of_. _ months. 

[H_r, If the tin_l-aopd wheu_Qlkulutrun_..t ImIOlMltofyour newlntenm rate.nd 

payment, your _inlel!St ..... anll Pl¥ment may bedifl'erenUrom W .m!iIu.ts above. We will sond you 

another natk:awlth" !!IS! IimoIMlt of your _1!fteNSt me and payment 2 to 4 months before the first n_ 

payment Is dilll, if your new paym6ntwiRbe d.r.nt from your ~urrentpaym.nt.l 

DntI!!ft:OPIr Puma"" '\'bur new. payment will not cover any prlndpal. Therefore,makil'lg this payment will not 

reduce your loan balance.] 

Maml-'bod Inc." in!pur I.p!P ."Ppt: Your new paymentOOlllilrsonly.part of the Interest and no 

principal. Therefore, the unpaid interest will acid to the balance of the loan. In order to fully payoff your loan by 

the end of the loan tennatthe·new interest rate, you woul.d have to pay > __ per month.1J 

rprepaymenthgalty: IlllonellKeep In mind that If you pay off your loan, refinance or sell your home.before 

(dare), you could be charged a penalty. Contact (mortgage company) at the telephone number far (im!al/oddress)] 

below for more Information, Neh as tha maximum amount ohne penalty you could bechargecl.ll 

'ypuA .... '.b ..... IrI·veHr' ..... · • Contact(ma~ company} at (telephone number) [or (email address}] auoan as pO$$lble. 

• tfyou seek lin alterna~ to the upcoming chllll'\!lllS to your Interest !'lllte and pllYment, the fOlloWIng 

options may be possible (most are sublect to lender approval}: 

- R!I!1inahceY9!.!r 19'n with us or iIInather lender; 

- Se!11!9Uf home and use the proceeds to pay orf your 'Current lOan; 

- MOIIlfyyoyr 19'1'1 t.er\'n$ with US; 

- Payment fgrb!!!!rance temporarily gives you moretlnie to pay your monthly payment. 

• If you would like conta..t information for counseling agencies or programs In your area, call the U.s. 

Department or Housing lind Urban DeVelopll'\llnt (HUO) at (ttlfphone number) or vlsi; !(lnterl'let address 

of the U.s. Department of HOuslhg and Urban Dwefopment aiunselingagenC)llfst) [or] tthe U.S. 

Consumei' Fln<.'!nclal Protection Bureau (CFPB) lit {Internet address of the u.s. Consumer FtnQf1cfa/ 

Protection Bureauhomeownership coulTSelorsand counsellhgorganizaliontistn.lfyou woukllll<e contact 

info(ltlatiotl for a statel10uslllg finanCe ageney, contact the U:5. COnsumer Finaridal Protection Bureau 

(CfPB) itt (fntemiJt Qdd(flSs of u.s. COnSume!' findrIdQ/ Pr6fe(;tion.Bitiealrsb:lte houslrtij fliJOflr::ti!Ogel'lty 

access list); 
11012 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 


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I 

I 

H-4(D)(4) Sample Form for § l026.20(d) 

Jardanand. Da.n.aSt:\'Iith 

4700 Jon. Drive 

Memphis, TN 3&109 

SptlnJSldeMortpp 

123'4 MatnSt 

Memphis, TN 31801 

Changes to YOU! Mortgage Interest Rate and Payments on September L 2012 

Un'.rt .. lennI of your All,iustllltle-Rat. Mortpp.(ARM), you W.th....,..r period durinawhk:hyour 

lnte ... ·'ate .. d , .......... That period .ndson ..... m ... r1, 2012.,10 on that date your late ... rate m.y 

thence. Afterthst, your Interest rate ma'chanP.n .... llrfon ..... ofyourloanurm. Aflych.ncelnyour 

iiditr.t ... may.IsQch .... yourrllortPP paymHt.AIso. as of Sapt8mb1tr 1, 2012. your mortpp paym_ 

.HI inc:lud. prlnclpal.swaR aslnbtrad. 

IntlglIt ... : We eal.cula_d your fnterest rate by tal<in,s publlshec«i"lndexrate" and add'"'s certain number of 

percentage points, cafted the "margin," Under your loan agreement, your Index rate Isthe l-year UBORand your 

rnars/n 1$ 2.25,," The LlB()Rlndex Is pUblished dallY!n thew.1I Stl'eetJoumal. 

Batt Umi!F Your rate.ca.nnot IP higher than 11.625% over the IIfe.oftheloan: Your rate can che,. each year by 

no mare than 2.00%. We did not Include anadditlonall~OO%lnterestrate Increase tovaur new rate because a rate 

limit appfied. Thlsaddl~onaUncreue may be applied to yourlnterest rate when it adJtJstsaprn on September 1, 

2013. 

_'.rat Rat! sM N-Iv Ptymtnt: Theta.ble above\.shows cur estimate dyourn.ewinterest rate and new 

monthly payment. These amounts araba*, on the UBOR lndeU$ of now, your mars/n, yoQr Joen.balanceof 

$l00.000. and yoQr remafnlns.loen termofg24 months. HoweWIl'l if the UBOR Index"'$ ch .... wa.n we 

calculitethellXllCt.amount of your new late ... rate. paym-., pr new laterast , •• nd payment"'aJ be 

dlffere .. front the. IStJmat' above. We:WiR sel'id.yoa anot_ notkt_tht.taa amount. of your new I ..... ~t 

rate aM paym.ntZ to "months ..... thtftntnaw payment isdUlt, it your new paymentwlll_dlfferent front 

yourcummt papnenL 

PrepmntmtPwb: None 

'J9" A."", P«*ItruMallincVOurhym!nI:t: 

-confactSprlngsfde Mortgage at l.,aoo..555-4561 as SOQ" as possible. 

• I'you seek an alternative. to the upcomlngcttanaesto your interest rate and payment. the follow!n, 

options maJb~ possible{lTlOilt are subject to lender approval}: 

- fSeffnancuOlJr I.n with us or another lender; 

- Sell your home and use the proceeds to pay off your current loan; 

- Modify YOYr!oln ttrmsWith us; - Pmeot forMaranee t:emporarllygivesyoQ more time to pavyour monthly payment 

• tfyou. would IlIte (ontact Infortl'latlonforcounsellnS apnctesar programs Inyout area, eallttlt U.S; 

Departmeot.of Houslng8ndUrban Development (HUD)at 800-569-428101' visit 

www,trud,plofftceslbsglsfhlhgc;llp.cfm,·lfyoQ would like contact fnformatlonfor estate housing 

finance agency, visit the US. Consumer Finandel Protection Bureau (CFPB) at 
Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 11013 

* * * * * 


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H;=4lEl Fixed RateMons.ln!erest.R*.and eavment;Summarv;MmlCJause. 

E:stntxes:+,murabce(~J 

.t;' (Jni!UCleil[P.ni+.:iltfIMcI1tg8Qe 

.. IHlFl AdlyetableeRate:Mortaaae·or §tedate MortHle Interut Rate .. and.Payment.Summary Model . Clause. 

.$- I $-
11014 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 


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H-30(A) Sample Form of Periodic Statement 

Springside Mortgage 

Customer Service: 1-800-555-1234 

www.springsidemortgage.com 

Jordan and Dana Smith 

4700 Jones Drive 

Memphis, TN 38109 

Springside Mortgage 

Springside Mortgage 

P.O. Box 11111 

MempiHs. TN 38101 

1234567 34571892 

Account Number 

Payment Due Date 

Amount Due 

Mortgage Statement 

Statement Date: 3/20/2012 

1234567 

4/1/2012 

$2,079.71 

If payment is received after 4/15/12, $160 late fee will be charged. 

Due By 4/1/2012: $2.079.71 

$UiO IIlIe fee wilt be <IltJ(gedofter4/lS/U 

AddltlOMI Prlnclpel $ 

Additional Eserow $ 

342359127 
Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 11015 


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H-30(B) Sample Form of Periodic Statement with Delinquency Box 

Springside Mortgage 

Customer Service: 1-800-555-1234 

www.springsidemortgage.com 

lordan and Dana Smith 

4700 Jones Drive 

Memphis, TN 38109 

°hrtlll •• .,...-, AIry partial paymenlS that yOu rna"'" are 

_applied lI>yOU' rno<tpj!e. but ImlNd.,.. held 'n a 

~.rate suspense account If yOU pay the balance of Ii partial 

poymallt. the fund. wBI the .. b. applied II> yOUr mortpp. 

Springside Mortgage 

Sprinll"ide Mortgage 

P.o. 801111111 

Los Angeles, CA 90010 

123456734571892 

Mortgage Statement 

Statement Date: 3/20/2012 

Account Number 

Payment Due Date 

Amount Due 

1234567 

4/1/2012 

$4,339.13 

if payment is received after 4/15/12, $160 late fee wl1l be charged. 

Interest 

("'lOW ITues"nd lmurancel 

........ MonlIIIy Po...,.. Total FeIS and 01 .... 

You _loWonyow ........ "" .. onll. Failure II> brlnl yOUr feen current may result In fees and fcredosure-the 1_ 

of yOUr nome. ~ of March 20. yOU are 49 d ••• nquent on 

yOUr rno<tpj!e loan, 

ReaHltAcalllllt HfSlrW)l 

• Payment due 12/1/11: Fully paid on lime 

• Payment due 1/1/12: Fully paid on 2/3/12 

• Payment due 2/1/12: Unpaid balance of 5589.71 

• Payment due 3/1/12: Unpaid balance of $2.079.71 

• Qlrrent payment due 4/1/12: $1,669.71 

• T_t$4,<BII.Ud .... V ...... IId ... 'd .... ""' .. mto 1Irt .. ...... _ ... mollt. 

IfVCItIANtxpeo....."FlMndallllllieldllr. see back for 

Informallon abcut rnortpse """"'eli", or ... Istance. 

Due By 4/1/2012: $4,339.13 

$l6Q Jaie fee will be chorged Q[ter4/lS/U 

Additional I'I'IOOpal $ 

Additional Escrow S 

342359127 ON 
11016 Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 

BILLING CODE 4810–AM–C 

H–30(D) Sample Clause for Homeownership 

Counselor Contact Information 

Housing Counselor Information: If you 

would like counseling or assistance, you can 

contact the following: 

• U.S. Department of Housing and Urban 

Development (HUD): For a list of 

homeownership counselors or counseling 

organizations in your area, go to http:// 

www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm or 

call 800–569–4287. 

* * * * * 

■ 7. In Supplement I to Part 1026— 

Official Interpretations: 

■ A. Under Section 1026.17—General 

Disclosure Requirements: 

■ i. Under Paragraph 17(a)(1), 

paragraph 2.ii is revised. 

■ ii. Under Paragraph 17(c)(1), 

paragraph 1 is revised. 


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H-30(C) Sample Form of Periodic Statement for a Payment-Options Loan 

Springside Mortgage 

Customer Service: 1-800-555-1234 

www.springsidemortgage.com 

Jordan and Dana Smith 

4700 Jones Drive 

Mem phis, TN 38109 

Principal 

Interest 

Escrow (Taxes and Insurance) 

Fees 

Total 

Sprinpide Mortcage 

SpringskIe Mortpge 

p,o. Box 11111 

los Angeles, CA 90010 

PaId ...... 

Mo..th 

$384.93 

$1,049.60 

$235.18 

$0.00 

$1,669.71 

p.idV •• r 

to on. 

$1,150.25 

$3,153.34 

$705.54 

$0.00 

$5,009.13 

Account Number 

Payment Due Date 

Mortgage Statement 

Statement Date: 3/20/2012 

Amount Due Option 1 (Full): 

1234567 

4/1/2012 

$1,829.71 

Option 2 (Interest-Only): $1,443.25 

Option 3 (Minimum): $1,156.43 

If payment is received after 4/15/12, $160 late fee will be charged. 

o Optfon 1 (Full): $L829.71 

Due By 4/1/2012: 0 Option 2 (lnterest-Ontv): $1,443.25 

Addltlon.1 Principal 

Addltlon.1 Escrow 

o Optfon 3 (Minimum): $1,156.43 

$ 

$ 

123456734571892 342359121P 
Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 11017 

■ B. Under Section 1026.19—Certain 

Mortgage and Variable-Rate 

Transactions: 

■ i. Under 19(b) Certain variable-rate 

transactions, paragraphs 4 and 5.i.C are 

revised. 

■ ii. Under Paragraph 19(b)(2)(xi), 

paragraph 1 is revised. 

■ C. The heading for Section 1026.20 is 

revised. 

■ D. Under newly designated Section 

1026.20: 

■ i. Paragraph 20(c) Variable-rate 

adjustments is revised. 

■ ii. Paragraph 20(d) Initial rate 

adjustment is added. 

■ E. Under Section 1026.36—Prohibited 

Acts or Practices in Connection With 

Credit Secured by a Dwelling, under 

36(c) Servicing practices: 

■ i. Paragraph 36(c)(1)(i), paragraph 2, 

and Paragraph 36(c)(1)(ii), Paragraph 

36(c)(1)(iii), and Paragraph 36(c)(2) are 

revised. 

■ ii. Paragraph 36(c)(3) is added. 

■ F. Section 1026.41—Periodic 

Statements for Residential Mortgage 

Loans is added. 

■ G. Under Appendix H—Closed-End 

Model Forms and Clauses, paragraphs 7 

introductory text and 7.i are revised. 

The revisions and additions read as 

follows: 

Supplement I to Part 1026—Official 

Interpretations 

* * * * * 

Subpart C—Closed-End Credit 

* * * * * 

Section 1026.17–General Disclosures 

Requirements 

17(a) Form of disclosures. 

Paragraph 17(a)(1). 

* * * * * 

2. * * * 

ii. The general segregation requirement 

described in this subparagraph does not 

apply to the disclosures required under 

§ 1026.19(b) although the disclosures must be 

clear and conspicuous. 

* * * * * 

17(c) Basis of disclosures and use of 

estimates. 

Paragraph 17(c)(1). 

1. Legal obligation. The disclosures shall 

reflect the credit terms to which the parties 

are legally bound as of the outset of the 

transaction. In the case of disclosures 

required under § 1026.20(c) and (d), the 

disclosures shall reflect the credit terms to 

which the parties are legally bound when the 

disclosures are provided. The legal obligation 

is determined by applicable State law or 

other law. (Certain transactions are 

specifically addressed in this commentary. 

See, for example, the discussion of buydown 

transactions elsewhere in the commentary to 

§ 1026.17(c).) The fact that a term or contract 

may later be deemed unenforceable by a 

court on the basis of equity or other grounds 

does not, by itself, mean that disclosures 

based on that term or contract did not reflect 

the legal obligation. 

* * * * * 

Section 1026.19—Certain Mortgage and 

Variable-Rate Transactions 

* * * * * 

19(b) Certain variable-rate transactions. 

* * * * * 

4. Other variable-rate regulations. 

Transactions in which the creditor is 

required to comply with and has complied 

with the disclosure requirements of the 

variable-rate regulations of other Federal 

agencies are exempt from the requirements of 

§ 1026.19(b), by virtue of § 1026.19(d). The 

exception is also available to creditors that 

are required by State law to comply with the 

Federal variable-rate regulations noted above. 

Creditors using this exception should comply 

with the timing requirements of those 

regulations rather than the timing 

requirements of Regulation Z in making the 

variable-rate disclosures. 

5 * * * 

i. * * * 

C. ‘‘Price-level-adjusted mortgages’’ or 

other indexed mortgages that have a fixed 

rate of interest but provide for periodic 

adjustments to payments and the loan 

balance to reflect changes in an index 

measuring prices or inflation. The 

disclosures under § 1026.19(b)(1) are not 

applicable to such loans, nor are the 

following provisions to the extent they relate 

to the determination of the interest rate by 

the addition of a margin, changes in the 

interest rate, or interest rate discounts: 

§ 1026.19(b)(2)(i), (iii), (iv), (v), (vi), (vii), 

(viii), and (ix). (See comments 20(c)(1)(ii)– 

3.ii, 20(d)(1)(ii)–2.ii, and 30–1 regarding the 

inapplicability of variable-rate adjustment 

notices and interest rate limitations to pricelevel-adjusted or similar mortgages.) 

* * * * * 

Paragraph 19(b)(2)(xi). 

1. Adjustment notices. A creditor must 

disclose to the consumer the type of 

information that will be contained in 

subsequent notices of adjustments and when 

such notices will be provided. (See the 

commentary to § 1026.20(c) and (d) regarding 

notices of adjustments.) For example, the 

disclosure provided pursuant to § 1026.20(d) 

might state, ‘‘You will be notified at least 

210, but no more than 240, days before the 

first payment at the adjusted level is due after 

the initial interest rate adjustment of the 

loan. This notice will contain information 

about the adjustment, including the interest 

rate, payment amount, and loan balance.’’ 

The disclosure provided pursuant to 

§ 1026.20(c) might state, ‘‘You will be 

notified at least 60, but no more than 120, 

days before the first payment at the adjusted 

level is due after any interest rate adjustment 

resulting in a corresponding payment change. 

This notice will contain information about 

the adjustment, including the interest rate, 

payment amount, and loan balance.’’ 

* * * * * 

Section 1026.20—Disclosure Requirements 

Regarding Post-Consummation Events 

* * * * * 

20(c) Rate adjustments with a 

corresponding change in payment. 

1. Creditors, assignees, and servicers. 

Creditors, assignees, and servicers that own 

either the applicable adjustable-rate mortgage 

or the applicable mortgage servicing rights or 

both are subject to the requirements of 

§ 1026.20(c). Creditors, assignees, and 

servicers are also subject to the requirements 

of any provision of subpart C that governs 

§ 1026.20(c). For example, the form 

requirements of § 1026.17(a) apply to 

§ 1026.20(c) disclosures and thus, assignees 

and servicers, as well as creditors, are subject 

to those requirements. While creditors, 

assignees, and servicers are all subject to the 

requirements of § 1026.20(c), they may 

decide among themselves which of them will 

provide the required disclosures. 

2. Loan modifications. Under § 1026.20(c), 

the interest rate adjustment disclosures are 

required only for interest rate adjustments 

occurring pursuant to the loan contract. 

Accordingly, creditors, assignees, and 

servicers need not provide the disclosures for 

interest rate adjustments occurring in loan 

modifications made for loss mitigation 

purposes. Subsequent interest rate 

adjustments resulting in a corresponding 

payment change occurring pursuant to the 

modified loan contract, however, are subject 

to the requirements of § 1026.20(c). 

3. Conversions. In addition to the 

disclosures required for interest rate 

adjustments under an adjustable-rate 

mortgage, § 1026.20(c) also requires the 

disclosures for an ARM converting to a fixedrate transaction when the conversion changes 

the interest rate and results in a 

corresponding payment change. When an 

open-end account converts to a closed-end 

adjustable-rate mortgage, the § 1026.20(c) 

disclosure is not required until the 

implementation of an interest rate adjustment 

post-conversion that results in a 

corresponding payment change. For example, 

for an open-end account that converts to a 

closed-end 3/1 hybrid ARM, i.e., an ARM 

with a fixed rate of interest for the first three 

years after which the interest rate adjusts 

annually, the first § 1026.20(c) disclosure 

would not be required until three years after 

the conversion, and only if that first 

adjustment resulted in a payment change. 

Paragraph 20(c)(1)(i). 

1. In general. An adjustable-rate mortgage, 

as defined in § 1026.20(c)(1)(i), is a variablerate transaction as that term is used in 

subpart C, except as distinguished by 

comment § 1026.20(c)(1)(ii)–3. The 

requirements of this section are not limited 

to transactions financing the initial 

acquisition of the consumer’s principal 

dwelling. 

Paragraph 20(c)(1)(ii). 

1. Short-term ARMs. Under 

§ 1026.20(c)(1)(ii), construction, home 

improvement, bridge, and other loans with 

terms of one year or less are not subject to 

the requirements in § 1026.20(c). In 

determining the term of a construction loan 

that may be permanently financed by the 

same creditor or assignee, the creditor or 

assignee may treat the construction and the 

permanent phases as separate transactions 

with distinct terms to maturity or as a single 

combined transaction. 

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2. First new payment due within 210 days 

after consummation. Section 1026.20(c) 

disclosures are not required if the first 

payment at the adjusted level is due within 

210 days after consummation, when the new 

interest rate disclosed at consummation 

pursuant to § 1026.20(d) is not an estimate. 

For example, the creditor, assignee, or 

servicer would not be required to provide the 

disclosures required by § 1026.20(c) for the 

first time an ARM interest rate adjusts if the 

first payment at the adjusted level was due 

120 days after consummation and the 

adjusted interest rate disclosed at 

consummation pursuant to § 1026.20(d) was 

not an estimate. 

3. Non-adjustable-rate mortgages. The 

following transactions, if structured as fixedrate and not as adjustable-rate mortgages 

based on an index or formula, are not subject 

to § 1026.20(c): 

i. Shared-equity or shared-appreciation 

mortgages; 

ii. Price-level adjusted or other indexed 

mortgages that have a fixed rate of interest 

but provide for periodic adjustments to 

payments and the loan balance to reflect 

changes in an index measuring prices or 

inflation; 

iii. Graduated-payment mortgages or steprate transactions; 

iv. Renewable balloon-payment 

instruments; and 

v. Preferred-rate loans. 

Paragraph 20(c)(2). 

1. Timing. The requirement that 

§ 1026.20(c) disclosures be provided to 

consumers within a certain timeframe means 

that the creditor, assignee, or servicer must 

deliver the notice or place it in the mail 

within that timeframe, excluding any grace or 

courtesy periods. The requirement that the 

§ 1026.20(c) disclosures must be provided 

between 25 and 120 days before the first 

payment at the adjusted level is due for 

frequently-adjusting ARMs, applies to ARMs 

that adjust regularly at a maximum of every 

60 days. 

Paragraph 20(c)(2)(ii)(A). 

1. Current and new interest rates. The 

current interest rate is the interest rate that 

applies on the date the disclosure is provided 

to the consumer. The new interest rate is the 

actual interest rate that will apply on the date 

of the adjustment. The new interest rate is 

used to determine the new payment. The 

‘‘new interest rate’’ has the same meaning as 

the ‘‘adjusted interest rate.’’ The 

requirements of § 1026.20(c)(2)(ii)(A) do not 

preclude creditors, assignees, and servicers 

from rounding the interest rate, pursuant to 

the requirements of the ARM contract. 

Paragraph 20(c)(2)(iv). 

1. Rate limits and foregone interest rate 

increases. Interest rate carryover, or foregone 

interest rate increases, is the amount of 

interest rate increase foregone at any ARM 

interest rate adjustment that, subject to rate 

caps, can be added to future interest rate 

adjustments to increase, or to offset decreases 

in, the rate determined by using the index or 

formula. The disclosures required by 

§ 1026.20(c)(2)(iv) regarding foregone interest 

rate increases apply only to transactions 

permitting interest rate carryover. 

Paragraph 20(c)(2)(v)(B). 

1. Application of previously foregone 

interest rate increases. The disclosures 

regarding the application of previously 

foregone interest rate increases apply only to 

transactions permitting interest rate 

carryover. 

Paragraph 20(c)(2)(vi). 

1. Amortization statement. For ARMs 

requiring the payment of interest only, such 

as interest-only loans, § 1026.20(c)(2)(vi) 

requires a statement that the new payment 

covers all of the interest but none of the 

principal, and therefore will not reduce the 

loan balance. For negatively-amortizing 

ARMs, § 1026.20(c)(2)(vi) requires a 

statement that the new payment covers only 

part of the interest and none of the principal, 

and therefore the unpaid interest will be 

added to the principal balance. 

2. Amortization payment. Disclosure of the 

payment needed to amortize fully the 

outstanding balance at the new interest rate 

over the remainder of the loan term is 

required only when negative amortization 

occurs as a result of the interest rate 

adjustment. The disclosure is not required 

simply because a loan has interest-only or 

partially-amortizing payments. For example, 

an ARM with a five-year term and payments 

based on a longer amortization schedule, in 

which the final payment will equal the 

periodic payment plus the remaining unpaid 

balance, does not require disclosure of the 

payment necessary to amortize fully the loan 

in the remainder of the five-year term. A 

disclosure is also not required when the new 

payment is sufficient to prevent negative 

amortization but the final loan payment will 

be a different amount due to rounding. 

Paragraph 20(c)(2)(vii). 

1. Prepayment penalty. The creditor, 

assignee, or servicer of an ARM with no 

prepayment penalty, as that term is used in 

§ 1026.20(c)(2)(vii), may decide to exclude 

the prepayment section from the § 1026.20(c) 

disclosure, retain the prepayment section and 

insert after the heading ‘‘None’’ or other 

indication that there is no prepayment 

penalty, or indicate there is no prepayment 

penalty in some other manner. See also 

comment 1.vi to Appendices G and H— 

Open-End and Closed-End Model Forms and 

Clauses. 

Paragraph 20(c)(3)(i). 

1. Format of disclosures. The requirements 

of § 1026.20(c)(3)(i) and (ii) to provide the 

§ 1026.20(c) disclosures in the same order as, 

and with headings and format substantially 

similar to, the model and sample forms do 

not preclude creditors, assignees, and 

servicers from modifying the disclosures to 

accommodate particular consumer 

circumstances or transactions not addressed 

by the forms. For example, in the case of a 

consumer bankruptcy or under certain State 

laws, the creditor, assignee, or servicer may 

modify the forms to remove language 

regarding personal liability. Creditors, 

assignees, and servicers providing the 

required notice to a consumer whose ARM is 

converting to a fixed-rate mortgage, may 

modify the model language to explain that 

the interest rate will no longer adjust. 

Creditors, assignees, and servicers electing to 

provide consumers with interest rate notices 

in cases where the interest rate adjusts 

without a corresponding change in payment 

may modify the forms to fit that 

circumstance. A payment-option ARM, 

which is an ARM permitting consumers to 

choose among several different payment 

options for each billing period, is an example 

of a loan that may require modification of the 

§ 1026.20(c) model and sample forms. See 

appendix H–30(C) for an example of an 

allocation table for a payment-option loan. 

20(d) Initial rate adjustment. 

1. Creditors, assignees, and servicers. 

Creditors, assignees, and servicers that own 

either the applicable adjustable-rate mortgage 

or the applicable mortgage servicing rights or 

both are subject to the requirements of 

§ 1026.20(d). Creditors, assignees, and 

servicers are also subject to the requirements 

of any provision of subpart C that governs 

§ 1026.20(d). For example, the form 

requirements of § 1026.17(a) apply to 

§ 1026.20(d) disclosures and thus, assignees 

and servicers, as well as creditors, are subject 

to those requirements. While creditors, 

assignees, and servicers are all subject to the 

requirements of § 1026.20(d), they may 

decide among themselves which of them will 

provide the required disclosures. 

2. Loan modifications. Under § 1026.20(d), 

the interest rate adjustment disclosures are 

required only for the initial interest rate 

adjustment occurring pursuant to the loan 

contract. Accordingly, creditors, assignees, 

and servicers need not provide the 

disclosures for interest rate adjustments 

occurring in loan modifications made for loss 

mitigation purposes. The initial interest rate 

adjustment occurring pursuant to the 

modified loan contract, however, is subject to 

the requirements of § 1026.20(d). 

3. Timing and form of initial rate 

adjustment. The requirement that 

§ 1026.20(d) disclosures be provided in 

writing, separate and distinct from all other 

correspondence, means that the initial ARM 

interest rate adjustment notice must be 

provided to consumers as a separate 

document but may, in the case of mailing the 

disclosure, be in the same envelope with 

other material and, in the case of emailing 

the disclosure, be a separate attachment from 

other attachments in the same email. The 

requirement that the disclosures be provided 

to consumers between 210 and 240 days 

‘‘before the first payment at the adjusted level 

is due’’ means the creditor, assignee, or 

servicer must deliver the notice or place it in 

the mail between 210 and 240 days prior to 

the due date, excluding any grace or courtesy 

periods, of the first payment calculated using 

the adjusted interest rate. 

4. Conversions. When an open-end account 

converts to a closed-end adjustable-rate 

mortgage, the § 1026.20(d) disclosure is not 

required until the implementation of the 

initial interest rate adjustment postconversion. For example, for an open-end 

account that converts to a closed-end 3/1 

hybrid ARM, i.e., an ARM with a fixed rate 

of interest for the first three years after which 

the interest rate adjusts annually, the 

§ 1026.20(d) disclosure would not be 

required until three years after the 

conversion when the interest rate adjusts for 

the first time. 

Paragraph 20(d)(1)(i). 

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1. In general. An adjustable-rate mortgage, 

as defined in § 1026.20(d)(1)(i), is a variablerate transaction as that term is used in 

subpart C, except as distinguished by 

comment § 1026.20(d)(1)(ii)–2. The 

requirements of this section are not limited 

to transactions financing the initial 

acquisition of the consumer’s principal 

dwelling. 

Paragraph 20(d)(1)(ii). 

1. Short-term ARMs. Under 

§ 1026.20(d)(1)(ii), construction, home 

improvement, bridge, and other loans with 

terms of one year or less are not subject to 

the requirements in § 1026.20(d). In 

determining the term of a construction loan 

that may be permanently financed by the 

same creditor or assignee, the creditor or 

assignee may treat the construction and the 

permanent phases as separate transactions 

with distinct terms to maturity or as a single 

combined transaction. 

2. Non-adjustable-rate mortgages. The 

following transactions, if structured as fixedrate and not as adjustable-rate mortgages 

based on an index or formula, are not subject 

to § 1026.20(d): 

i. Shared-equity or shared-appreciation 

mortgages; 

ii. Price-level adjusted or other indexed 

mortgages that have a fixed rate of interest 

but provide for periodic adjustments to 

payments and the loan balance to reflect 

changes in an index measuring prices or 

inflation; 

iii. Graduated-payment mortgages or steprate transactions; 

iv. Renewable balloon-payment 

instruments; and 

v. Preferred-rate loans. 

Paragraph 20(d)(2)(i). 

1. Date of the disclosure. The date that 

must appear on the disclosure is the date the 

creditor, assignee, or servicer generates the 

notice to be provided to the consumer. 

Paragraph 20(d)(2)(iii)(A). 

1. Current and new interest rates. The 

current interest rate is the interest rate that 

applies on the date of the disclosure. The 

new interest rate is the interest rate used to 

calculate the new payment and may be an 

estimate pursuant to § 1026.20(d)(2). The 

new payment, if calculated from an estimated 

new interest rate, will also be an estimate. 

The ‘‘new interest rate’’ has the same 

meaning as the ‘‘adjusted interest rate.’’ The 

requirements of § 1026.20(d)(2)(iii)(A) do not 

preclude creditors, assignees, and servicers 

from rounding the interest rate, pursuant to 

the requirements of the ARM contract. 

Paragraph 20(d)(2)(v). 

1. Rate limits and foregone interest rate 

increases. Interest rate carryover, or foregone 

interest rate increases, is the amount of 

interest rate increase foregone at the first 

ARM interest rate adjustment that, subject to 

rate caps, can be added to future interest rate 

adjustments to increase, or to offset decreases 

in, the rate determined by using the index or 

formula. The disclosures required by 

§ 1026.20(d)(2)(v) regarding foregone interest 

rate increases apply only to transactions 

permitting interest rate carryover. 

Paragraph 20(d)(2)(vii). 

1. Amortization statement. For ARMs 

requiring the payment of interest only, such 

as interest-only loans, § 1026.20(d)(2)(vii) 

requires a statement that the new payment 

covers all of the interest but none of the 

principal, and therefore will not reduce the 

loan balance. For negatively-amortizing 

ARMs, § 1026.20(d)(2)(vii) requires a 

statement that the new payment covers only 

part of the interest and none of the principal, 

and therefore the unpaid interest will be 

added to the principal balance. 

2. Amortization payment. Disclosure of the 

payment needed to amortize fully the 

outstanding balance at the new interest rate 

over the remainder of the loan term is 

required only when negative amortization 

occurs as a result of the interest rate 

adjustment. The disclosure is not required 

simply because a loan has interest-only or 

partially-amortizing payments. For example, 

an ARM with a five-year term and payments 

based on a longer amortization schedule, in 

which the final payment will equal the 

periodic payment plus the remaining unpaid 

balance, does not require disclosure of the 

payment necessary to amortize fully the loan 

in the remainder of the five-year term. A 

disclosure is also not required when the new 

payment is sufficient to prevent negative 

amortization but the final loan payment will 

be a different amount due to rounding. 

Paragraph 20(d)(2)(viii). 

1. Prepayment penalty. The creditor, 

assignee, or servicer of an ARM with no 

prepayment penalty, as that term is used in 

§ 1026.20(d)(2)(viii), may decide to exclude 

the prepayment section from the § 1026.20(d) 

disclosure, retain the prepayment section and 

insert after the heading ‘‘None’’ or other 

indication that there is no prepayment 

penalty, or indicate there is no prepayment 

penalty in some other manner. See also 

comment to Appendices G and H—Open-End 

and Closed-End Model Forms and Clauses— 

1.vi. 

Paragraph 20(d)(3)(i). 

1. Format of disclosures. The requirements 

of § 1026.20(d)(3)(i) and (iii) to provide the 

§ 1026.20(d) disclosures in the same order as, 

and with headings and format substantially 

similar to, the model and sample forms do 

not preclude creditors, assignees, and 

servicers from modifying the disclosures to 

accommodate particular consumer 

circumstances or transactions not addressed 

by the forms. For example, in the case of a 

consumer bankruptcy or under certain State 

laws, the creditor, assignee, or servicer may 

modify the forms to remove language 

regarding personal liability. A paymentoption ARM, which is an ARM permitting 

consumers to choose among several different 

payment options for each billing period, is an 

example of a loan that may require 

modification of the § 1026.20(d) model and 

sample forms. See appendix H–30(C) for an 

example of an allocation table for a paymentoption loan. 

* * * * * 

Subpart E—Special Rules for Certain Home 

Mortgage Transactions 

* * * * * 

Section 1026.36—Prohibited Acts or 

Practices in Connection With Credit Secured 

by a Dwelling 

* * * * * 

Paragraph 36(c)(1)(i). 

* * * * * 

2. Method of crediting periodic payments. 

The method by which periodic payments 

shall be credited is based on the legal 

obligation between the creditor and 

consumer, subject to applicable law. 

* * * * * 

Paragraph 36(c)(1)(ii). 

1. Handling of partial payments. If a 

servicer receives a partial payment from a 

consumer, to the extent not prohibited by 

applicable law or the legal obligation 

between the parties, the servicer may take 

any of the following actions: 

i. Credit the partial payment upon receipt. 

ii. Return the partial payment to the 

consumer. 

iii. Hold the payment in a suspense or 

unapplied funds account. If the payment is 

held in a suspense or unapplied funds 

account, this fact must be reflected on future 

periodic statements, in accordance with 

§ 1026.41(d)(3). When sufficient funds 

accumulate to cover a periodic payment, as 

defined in § 1026.36(c)(1)(i), they must be 

treated as a periodic payment received in 

accordance with § 1026.36(c)(1)(i). 

Paragraph 36(c)(1)(iii). 

1. Payment requirements. The servicer may 

specify reasonable requirements for making 

payments in writing, such as requiring that 

payments be accompanied by the account 

number or payment coupon; setting a cut-off 

hour for payment to be received, or setting 

different hours for payment by mail and 

payments made in person; specifying that 

only checks or money orders should be sent 

by mail; specifying that payment is to be 

made in U.S. dollars; or specifying one 

particular address for receiving payments, 

such as a post office box. The servicer may 

be prohibited, however, from requiring 

payment solely by preauthorized electronic 

fund transfer. See section 913 of the 

Electronic Fund Transfer Act, 15 U.S.C. 

1693k. 

2. Payment requirements—limitations. 

Requirements for making payments must be 

reasonable; it should not be difficult for most 

consumers to make conforming payments. 

For example, it would be reasonable to 

require a cut-off time of 5 p.m. for receipt of 

a mailed check at the location specified by 

the servicer for receipt of such check. 

3. Implied guidelines for payments. In the 

absence of specified requirements for making 

payments, payments may be made at any 

location where the servicer conducts 

business; any time during the servicer’s 

normal business hours; and by cash, money 

order, draft, or other similar instrument in 

properly negotiable form, or by electronic 

fund transfer if the servicer and consumer 

have so agreed. 

Paragraph 36(c)(2). 

1. Pyramiding of late fees. The prohibition 

on pyramiding of late fees in § 1026.36(c)(2) 

should be construed consistently with the 

‘‘credit practices rule’’ of the Federal Trade 

Commission, 16 CFR 444.4. 

Paragraph 36(c)(3). 

1. Person acting on behalf of the consumer. 

For purposes of § 1026.36(c)(3), a person 

acting on behalf of the consumer may include 

the consumer’s representative, such as an 

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attorney representing the individual, a nonprofit consumer counseling or similar 

organization, or a creditor with which the 

consumer is refinancing and which requires 

the payoff statement to complete the 

refinancing. A creditor, assignee or servicer 

may take reasonable measures to verify the 

identity of any person acting on behalf of the 

consumer and to obtain the consumer’s 

authorization to release information to any 

such person before the ‘‘reasonable time’’ 

period begins to run. 

2. Payment requirements. The creditor, 

assignee or servicer may specify reasonable 

requirements for making payoff requests, 

such as requiring requests to be directed to 

a mailing address, email address, or fax 

number specified by the creditor, assignee or 

servicer or any other reasonable requirement 

or method. If the consumer does not follow 

these requirements, a longer timeframe for 

responding to the request would be 

reasonable. 

3. Accuracy of payoff statements. Payoff 

statements must be accurate when issued. 

* * * * * 

Section 1026.41—Periodic Statements for 

Residential Mortgage Loans 

41(a) In general. 

1. Recipient of periodic statement. When 

two consumers are joint obligors with 

primary liability on a closed-end consumer 

credit transaction secured by a dwelling, 

subject to § 1026.41, the periodic statement 

may be sent to either one of them. For 

example, if a husband and wife jointly own 

a home, the servicer need not send 

statements to both the husband and the wife; 

a single statement may be sent. 

2. Billing cycles shorter than a 31-day 

period. If a loan has a billing cycle shorter 

than a period of 31 days (for example, a biweekly billing cycle), a periodic statement 

covering an entire month may be used. Such 

statement would separately list the upcoming 

payment due dates and amounts due, as 

required by § 1026.20(d)(1), and list all 

transaction activity that occurred during the 

related time period, as required by paragraph 

(d)(4). Such statement may aggregate the 

information for the explanation of amount 

due, as required by paragraph (d)(2), and past 

payment breakdown, as required by 

paragraph (d)(3). 

3. One statement per billing cycle. The 

periodic statement requirement in § 1026.41 

applies to the ‘‘creditor, assignee, or servicer 

as applicable.’’ The creditor, assignee, and 

servicer are all subject to this requirement 

(but see comment 41(a)–4), but only one 

statement must be sent to the consumer each 

billing cycle. When two or more parties are 

subject to this requirement, they may decide 

among themselves which of them will send 

the statement. 

4. Opting out. A consumer may not opt out 

of receiving periodic statements altogether. 

However, consumers who have demonstrated 

the ability to access statements online may 

opt out of receiving notifications that 

statements are available. Such an ability may 

be demonstrated, for example, by the 

consumer receiving notification that the 

statements is available, going to the Web site 

where the information is available, viewing 

the information about their account and 

selecting a link or option there to indicate 

they no longer would like to receive 

notifications when new statements are 

available. 

41(b) Timing of the periodic statement. 

1. Reasonably prompt time. Section 

1026.41(b) requires that the periodic 

statement be delivered or placed in the mail 

no later than a reasonably prompt time after 

the payment due date or the end of any 

courtesy period. Delivering, emailing or 

placing the periodic statement in the mail 

within four days of close of the courtesy 

period of the previous billing cycle generally 

would be considered reasonably prompt. 

2. Courtesy period. The meaning of 

‘‘courtesy period’’ is explained in comment 

7(b)(11)–1. 

41(c) Form of the periodic statement. 

1. Clear and conspicuous standard. The 

‘‘clear and conspicuous’’ standard generally 

requires that disclosures be in a reasonably 

understandable form. Except where 

otherwise provided, the standard does not 

prohibit adding to the required disclosures, 

as long as the additional information does 

not overwhelm or obscure the required 

disclosures. For example, while certain 

information about the escrow account (such 

as the account balance) is not required on the 

periodic statement, this information may be 

included. 

2. Additional information; disclosures 

required by other laws. Nothing in § 1026.41 

prohibits a servicer from including additional 

information or combining disclosures 

required by other laws with the disclosures 

required by this subpart, unless such 

prohibition is expressly set forth in this 

subpart, or other applicable law. 

3. Electronic distribution. The periodic 

statement may be provided electronically if 

the consumer agrees. The consumer must 

give affirmative consent to receive statements 

electronically. If statements are provided 

electronically, the creditor, assignee, or 

servicer may send a notification that a 

consumer’s statement is available, with a link 

to where the statement can be accessed, in 

place of the statement itself. 

4. Presumed consent. Any consumer who 

is currently receiving disclosures for any 

account (for example, a mortgage or checking 

account) electronically from their servicer 

shall be deemed to have consented to 

receiving e-statements in place of paper 

statements. 

41(d) Content and layout of the periodic 

statement. 

1. Close proximity. Paragraph (d) requires 

several disclosures to be provided in close 

proximity to one another. To meet this 

requirement, the items to be provided in 

close proximity must be grouped together, 

and set off from the other groupings of items. 

This could be accomplished in a variety of 

ways, for example, by presenting the 

information in boxes, or by arranging the 

items on the document and including 

spacing between the groupings. Items in 

close proximity may not have any 

intervening text between them. 

2. Not applicable. If an item required by 

paragraph (d) or (e) of this section is not 

applicable to the loan, it may be omitted from 

the periodic statement or coupon book. For 

example, if there is no prepayment penalty 

associated with a loan, the prepayment 

penalty disclosures need not be provided on 

the periodic statement. 

3. Terminology. A servicer may use 

terminology other than that found on the 

sample periodic statement in appendix H–30, 

so long as the new terminology is commonly 

understood. For example, servicers may take 

into consideration regional differences in 

terminology and refer to the account for the 

collection of taxes and insurance, referred to 

in § 1026.41(d) as the ‘‘escrow account,’’ as 

an ‘‘impound account.’’ 

41(d)(3) Past payment breakdown. 

1. Partial payments. The disclosure of any 

partial payments received since the previous 

statement that were sent to a suspense or 

unapplied funds account as required by 

§ 1026.41(d)(3)(i) should reflect any funds 

that were received in the time period covered 

by the current statement and that were 

placed in such account. The disclosure of 

any portion of payments since the beginning 

of the calendar year that was sent to a partial 

payment or suspense account as required by 

§ 1026.41(d)(3)(ii) should reflect all funds 

that are currently held in a suspense or 

unapplied funds account. For example: 

i. Suppose a payment of $1,000 is due, but 

the consumer sends in only $600 on January 

1, which is held in a suspense account. 

Further assume there are no fees charged on 

this account. Assuming there are no other 

funds in the suspense account, the January 

statement should reflect: Unapplied funds 

since last statement—$600. Unapplied funds 

YTD—$600. 

ii. Assume the same facts as in the 

preceding paragraph, except that during 

February the consumer sends in $300 and 

this too is held in the suspense account. The 

statement should reflect: Unapplied funds 

since last statement—$300. Unapplied funds 

YTD—$900. 

iii. Assume the same facts as in the 

preceding paragraph, except that during 

March the consumer sends in $400. Of this 

payment, $100 completes a full periodic 

payment when added to the $900 in funds 

already held in the suspense account. This 

$1,000 is applied to the January payment, 

and the remaining $300 remains in the 

suspense account. The statement should 

reflect: Unapplied funds since last 

statement—$300. Unapplied Funds YTD— 

$300. 

41(d)(4) Transaction Activity. 

1. Meaning. Transaction activity includes 

any transaction that credits or debits the 

amount currently due. This is the same 

amount that is required to be disclosure 

under § 1026.41(d)(1)(iii). Examples of such 

transactions include, without limitation: 

i. Payments received and applied; 

ii. Payments received and held in a 

suspense account; 

iii. The imposition of any fees (for example 

late fees); and 

iv. The imposition of any charges (for 

example, private mortgage insurance). 

2. Description of late fees. The description 

of any late fee charges includes the date of 

the late fee, the amount of the late fee, and 

the fact that a late fee was imposed. 

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Federal Register / Vol. 78, No. 31 / Thursday, February 14, 2013 / Rules and Regulations 11021 

3. Partial payments. If a partial payment is 

sent to a suspense or unapplied funds 

account, this fact must be in the transaction 

description along with the date and amount 

of the payment. 

41(e)(3) Coupon book exemption. 

1. Fixed rate. For guidance on the meaning 

of ‘fixed rate’ for purpose of § 1026.41(e)(3), 

see § 1026.18(s)(7)(iii) and its commentary. 

2. Coupon book. A coupon book is a 

booklet provided to the consumer with a 

page for each billing cycle during a set period 

of time (often covering one year). These pages 

are designed to be torn off and returned to 

the servicer with a payment for each billing 

cycle. Additional information about the loan 

is often included on or inside the front or 

back cover, or on filler pages in the coupon 

book. 

3. Information location. The information 

required by paragraph (e)(3)(ii) need not be 

provided on each coupon, but should be 

provided somewhere in the coupon book. 

Such information could be located, e.g., on 

or inside the front or back cover, or on filler 

pages in the coupon book. 

4. Outstanding principal balance. 

Paragraph (e)(3)(ii)(A) requires the 

information listed in paragraph (d)(7) to be 

included in the coupon book. Paragraph 

(d)(7)(i) requires the disclosure of the 

outstanding principal balance. If the servicer 

makes use of a coupon book and the 

exemption in § 1026.41(e)(3), the servicer 

need only disclose the principal balance at 

the beginning of the time period covered by 

the coupon book. 

41(e)(4) Small servicers. 

41(e)(4)(ii) Small servicer defined. 

1. Small servicers that do not qualify for 

the exemption. A servicer that services any 

mortgage loans for which a servicer or an 

affiliate is not the creditor or assignee is not 

a small servicer. For example, a servicer that 

owns mortgage servicing rights for mortgage 

loans that are not owned by the servicer or 

an affiliate, or for which the servicer or an 

affiliate was not the entity to whom the 

obligation was initially payable, is not a 

small servicer. 

2. Master servicing and subservicing. Both 

a master servicer and a subservicer, as those 

terms are defined in 12 CFR 1024.31, must 

meet the requirements of a small servicer. For 

example, if a master servicer meets the 

definition of a small servicer, but retains a 

subservicer that does not meet the definition 

of a small servicer, the subservicer is not a 

small servicer for the purposes of 

determining any exemption, and must 

comply with the requirements of a servicer. 

41(e)(4)(iii) Small servicer determination. 

1. Loans obtained by merger or acquisition. 

Any mortgage loans obtained by a servicer or 

an affiliate as part of a merger or acquisition, 

or as part of the acquisition of all of the assets 

or liabilities of a branch office of a lender, 

should be considered mortgage loans for 

which the servicer or an affiliate is the 

creditor to which the mortgage loan is 

initially payable. A branch office means 

either an office of a depository institution 

that is approved as a branch by a Federal or 

State supervisory agency or an office of a forprofit mortgage lending institution (other 

than a depository institution) that takes 

applications from the public for mortgage 

loans. 

2. Application of evaluation threshold. The 

following examples demonstrate when a 

servicer either is considered or is no longer 

considered a small servicer: 

i. A servicer that begins servicing more 

than 5,000 mortgage loans on October 1, and 

services more than 5,000 mortgage loans as 

of January 1 of the following year, would no 

longer be considered a small servicer on 

April 1 of that following year. 

ii. A servicer that begins servicing more 

than 5,000 mortgage loans on February 1, and 

services more than 5,000 mortgage loans as 

of January 1 of the following year, would no 

longer be considered a small servicer on 

January 1 of that following year. 

iii. A servicer that begins servicing more 

than 5,000 mortgage loans on February 1, but 

services less than 5,000 mortgage loans as of 

January 1 of the following year, is considered 

a small servicer for that following year. 

* * * * * 

Appendix H—Closed-End Model Forms and 

Clauses 

* * * * * 

7. Models H–4(D) through H–4(J). These 

model clauses and sample and model forms 

illustrate certain notices, statements, and 

other disclosures required as follows: 

i. Model H–4(D)(1) illustrates the interest 

rate adjustment notice required under 

§ 1026.20(c) and Model H–4(D)(2) provides 

an example of a notice of interest rate 

adjustment with corresponding payment 

change. Model H–4(D)(3) illustrates the 

interest rate adjustment notice required 

under § 1026.20(d) and Model H–4(D)(4) 

provides an example of a notice of initial 

interest rate adjustment. 

* * * * * 

Dated: January 17, 2013. 

Richard Cordray, 

Director, Bureau of Consumer Financial 

Protection. 

[FR Doc. 2013–01241 Filed 2–1–13; 4:15 pm] 

BILLING CODE 4810–AM–P 

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